With about £300 billion saved in them, Cash ISAs have been incredibly popular with savers since their introduction in 1999. However, the introduction of the Personal Savings Allowance in April 2016 has led some savers to question whether they are still useful.
As we approach the end of the tax year, our Head of Digital, James Blower, looks at the circumstances in which certain types of savers should consider using their ISA allowance.
We are about to enter what has historically been dubbed ‘ISA season’. This is because the period between February and April typically sees savers looking to use their ISA allowances before the end of this tax year and then take advantage of the new allowance for the next tax year, which starts on 6 April.
The introduction of the Personal Savings Allowance means banks now automatically pay interest without tax deducted. Basic rate taxpayers can earn £1,000 in savings interest before they need to pay tax and higher rate taxpayers can earn £500 in interest before paying tax. This means about 95% of savers no longer pay tax on their savings.
Despite this, the appetite for ISAs hasn’t waned and there are still several types of savers for whom, and circumstances in which, ISAs should still be considered an option:
1. Existing Cash ISA savers
Anyone who has opened an ISA every tax year since 1999, and used the full allowance, has been able to shelter over £201,500 plus interest from the taxman and, in April, will be able to add a further £20,000 to that. Those savers who have used the allowance every year will, depending on interest rates they saved in, have somewhere in the region of £250,000 to £300,000 saved in ISAs. If you already have cash ISAs from previous tax years, it is worth considering retaining them to keep those tax-free allowances.
2. Additional rate taxpayers
Those taxpayers who earn more than £150,000 a year pay 45% tax and get no personal savings allowance, so they should consider cash ISAs.
3. First-Time Home Buyers
Lifetime ISAs, known as LISAs, are available for those aged 18 to 40, and you get a 25% bonus from the Government each year on top of anything you save. First-time buyers who save £4,000 get £1,000 from the Government. The bonus is paid every year until the saver is 50 years old.
Those saving for a home will find the 25% bonus very attractive and should certainly consider a LISA if they are saving for a deposit, but only if they will definitely buy a house with it, or don’t need that money before they are 60. This is because, if you take some or all the money out of it before then (other than to buy a property) you pay a 25% penalty on it.
4. Savers who may need access to their cash
Savers considering fixed-rate bonds but who want access to the cash during the term might prefer the flexibility that fixed rate ISAs have. Almost all cash ISA fixed rate bonds allow some form of access with a penalty interest charge.
5. Where the interest rate is better or very similar
Currently, several easy access ISA accounts pay the same or better rates than their ordinary counterparts. In these circumstances, even those savers who are not going to use their personal savings allowance may want to take out an ISA to take advantage of the tax-free status of the ISA, which can be carried on in future years. If interest rates continue to rise, this may be useful in future tax years if the amount of savings required to generate interest above the Personal Savings Allowance falls. Also, it is possible that the Personal Savings Allowance could be changed in the future.
To compare the latest ISA products and interest rates, visit https://moneyfacts.co.uk/isa/best-cash-isas/