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Is it still worthwhile for me to save in to a cash ISA account?

26th April 2016

Q. I’ve heard that I can now get £1000 interest from all savings without being taxed. Is it still worthwhile for me to save in to a cash ISA account?

A. On the 6 April the government introduced a personal savings allowance of up to £1,000 a year in interest, which means most people won’t have to pay tax on their savings income. In the past, the ISA (cash or stocks and shares ISA) was the only way to shelter your savings from the tax man so it is understandable to ask whether it is still worth you investing in an ISA account.

With the new changes, if you are a basic rate taxpayer – ie you earn less than £43,000 a year – then you will be allowed to earn up to £1,000 in interest on your cash savings without having to pay tax on it. In reality, however, it is going to be extremely difficult to earn more than £1,000 in interest with interest rates on savings accounts at their current low level.

Cash ISAs themselves do tend to have better rates than other savings accounts, and don’t require you to lock your money away as many other accounts do.

Andrew Featherstone, New Business Manager at Dynamic Cash Management said, “As the ISA allowance is one of a limited amount of tax free allowances for your cash savings, it is probably still best to maximise your ISA allowances and put money in to an ISA account first, and then use your personal allowance after that. You don’t have to have either/or – so as a saver you can use both your ISA allowances and Savings Accounts. 

Whatever you put in to an ISA account is protected from the taxman year after year, so you can gradually protect more and more. Next year the allowance will also increase to its highest ever cap of £20,000. The Government has also recently introduced the Help to Buy ISA and lifetime allowance ISA which are both very appealing for younger people looking to save flexibly for the longer term, aiming to help them to simultaneously save for a first home and for their retirement.

If you are a higher rate tax payer however, it’s a different story.

Andrew continues, “If you are a higher earner now or your tax bracket changes in to a higher rate, then your tax free personal allowance will drop. Higher rate taxpayers are only allowed to earn £500 in interest over the year without having to pay tax.”

For people who are 45% taxpayers – earning more than £150,000 a year – there will be no personal savings allowance, and they will have to pay tax at 45% on any savings interest.

If you are in a position where you can lock funds away for longer periods or have larger amounts to deposit, you may achieve a better rate in a long term savings account as opposed to an ISA.  There are some current accounts offering higher rates than ISA’s and Savings Accounts but these tend to have stricter criteria.  For example, the Best 1 Year Fixed ISA is 1.30% but the best 1 year fixed savings account is 1.70%.

With fairly low interest rates across the board, savers should look at any opportunity they can to maximise any tax allowances relevant to them and benefit from switching money between accounts so as not to lethargy

Bear in mind, before discounting ISAs for good, that when/if interest rates do rise, then the amount you can save before using up your Personal Savings Allowance will fall, so you will use it a lot quicker.  The first thing people should do is consult their Financial Adviser, who will work with you to address potential options when it comes to making the most of your tax allowances and getting the best rates for your savings.

Call one of our Savings Specialists on 0345 094 2255 or arrange a callback and we’ll get in touch.
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