Saving In The Government's Piggybank

If you're keen to avoid paying tax on your savings, then you can stash up to £96,000 this year into these tax-free accounts.

If you're a keen saver but don't like handing over a slice of your interest to the taxman, then it's well worth looking at the tax-free accounts available from National Savings & Investments (NS&I).

National Savings & Investments is, in effect, the government's own bank. It helps to support the government of the day's spending plans by attracting deposits from the general public. One weapon in its armoury is its ability to offer various tax-free savings accounts, which means that its interest rates can be quite attractive and give it an edge over its rivals. What's more, there's nothing safer than the government's own bank, which is protected by "the full faith and credit of the British government".

Here's a brief rundown of the savings accounts currently available from NS&I, together with a table at the end showing the interest rates:

Direct ISA (maximum deposit: £3,000 per person per tax year)

This is a cash mini-ISA paying a tax-free interest rate of 5.05% a year, which is guaranteed to be 0.55% above the Bank of England's base rate until April 2008. The minimum deposit is £1,000, you can deposit up to £3,000 per tax year, and you can manage your account by telephone and online only, hence the "Direct" tag.

Individual Savings Account (maximum deposit: £3,000 per person per tax year)

Again, this is a cash mini-ISA with a maximum deposit of £3,000 per tax year, but with a minimum deposit of £10 and a tax-free interest rate of 4.2% a year. NS&I also offers a TESSA-only ISA (TOISA) into which capital from a matured TESSA can be transferred.

You may open only one cash mini-ISA per tax year, so it's either/or for the two accounts above.

Fixed Interest Savings Certificates (maximum deposit: £30,000 in total)

These are tax-free savings bonds which require a minimum deposit of £100 and a maximum of £15,000 per issue. The two latest issues are the two-year 33rd issue and the five-year 83rd issue, both of which pay a fixed, tax-free interest rate of 3.2% a year.

Index-linked Savings Certificates (maximum deposit: £30,000 in total)

These are guaranteed to match the RPI rate of inflation (currently 3.3% a year), with a fixed rate of interest on top. The minimum deposit per issue is £100 and the maximum is £15,000. The three-year 13th issue pays a tax-free rate of RPI plus 1.05% a year (4.35% at present), and the five-year 41st issue pays RPI plus 1.1% (4.4% a year).

Premium Bonds (maximum: £30,000)

Instead of paying interest, Premium Bonds are entered into a monthly prize draw. Each £1 invested gives you the chance of winning a number of tax-free prizes, ranging from £50 to two £1 million jackpots. Of course, your personal return will depend on your luck, but the current prize-fund rate is 2.95% a year, and the latest odds of a £1 bond winning any prize are 24,000 to 1.

Children's Bonus Bonds (maximum: £3,000)

These are fixed-rate, five-year investments which are tax free for a child and its parents, grandparents, other relatives or friends. Issue 21 pays a tax-free 4.25% a year. Note that most children don't pay tax on their savings, so don't let the fact that these are tax-free savings bonds sway your decision too much.

SUMMARY OF NS&I'S PRODUCT RANGE

So, if you have £96,000 to spare, you can whack the lot into NS&I savings accounts today and enjoy tax-free, risk-free returns. Personally, I prefer to invest in shares, which offer potentially higher returns over the long term, but put both my capital and income at risk. Nevertheless, it's horses for courses, and National Savings & Investments' products do offer decent tax-free returns to patient, risk-averse savers.

More: Check out these everyday savings accounts, tax-free investments and children's accounts.