All the talk of low savings rates, personal savings allowances and base rate remaining stubbornly on hold could well have meant that you've completely overlooked your ISA for the current tax year. Well, this could be a big mistake: not only will you miss out on this year's tax-free benefits if you don't get your skates on, but even with the prospect of a savings allowance coming into force, you'd be wise to stick with an ISA, too…
The key thing to bear in mind with a cash ISA is that any interest you earn is entirely tax-free, so you don't need to worry about the taxman taking a chunk of your hard-earned savings. If you've got a typical savings account, or even a high interest current account, you'll have to give 20% of your savings income (if you're a basic rate taxpayer) to the taxman, and that could seriously take the sheen off your returns.
An ISA, therefore, has become the superstar of the savings market, as although you're only allowed to save a certain amount each tax year (currently £15,240), you'll be able to keep absolutely everything that you earn from it. This means a humble ISA can often outweigh the returns on offer with a traditional savings account, even if the rate is slightly lower than its basic counterpart, and besides, it's only a lucky few who are able to save more than the £15,240 limit each year.
There is one thing you'll need to think about, however, and that's the forthcoming personal savings allowance. From April, the first £1,000 earned in savings interest will be entirely tax-free (the first £500 for a higher rate taxpayer), which essentially brings traditional savings accounts in line with ISAs.
This, understandably, has had an impact on the ISA sector, with there being fears that the once-favoured account could become obsolete – and average cash ISA rates have been falling almost uncontrollably as a result. The change means that savings balances would have to be significant before any tax is payable (particularly in the current low-rate environment) and is expected to bring 95% of savers out of savings tax altogether, so why would you want to stick with an ISA?
Well, there are several reasons, actually, so you may not want to turn your back on these accounts just yet. Sure, they may seem unnecessary for the time being – if you're lucky enough to have an easy access rate of 1%, you'll need more than £100,000 stashed away before any interest will be subject to tax – but they'll undoubtedly come back into their own in the future.
Just think of what would happen if savings rates were to rise. It may seem like a pipe dream at the moment, but eventually, it could happen, and then earning £1,000 in interest won't seem quite so far-fetched. Let's say you were able to secure a rate of 5% in the future – in this case, you'd need a mere £20,000 in savings before the £1,000 interest limit would be met, so the benefits of a tax-free ISA would quickly return.
Then there's the issue that there's no way of knowing how long the personal savings allowance will last for, and if it were to be revoked in future years, all the savings you'd built up would be liable for tax. That wouldn't be the case if you'd still focused on an ISA: the savings you accumulate will be tax-free for life, and as you'll be able to add to your ISA pot every year, you could build up an incredibly healthy sum that will never at the mercy of the taxman.
So, do you really want to turn your back on ISAs? Hopefully you'll still have a need for them, and besides, you've still got a couple of months left to make the most of this year's tax-free allowance before all the changes kick in, so don't let it go to waste! Start by checking out our ISA best buys to find the best possible home for your money, and see if you can snap up a great rate.
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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