A cash ISA is simply a savings account that you don’t pay tax on. You can put £20,000 each tax year into a cash ISA, and it remains tax-free year on year. Cash ISA savings do not count towards the PSA (personal savings allowance). Yet, for many, such benefits are no longer relevant. This is especially true when you consider interest rates are often lower on cash ISAs than on regular savings accounts. Now, perhaps getting a higher return for any savings you have is more critical.
Add to that the chances of higher interest rates and the 2016 launch of the PSA, basic rate (20%) rate taxpayers can earn up to £1,000 interest a year from their savings without paying tax. Higher rate (40%) taxpayers can earn up to £500 before paying tax on interest at their marginal rate. Those in the Top tax tier of 45% pay tax on all interest earned.
With interest rates low, it could be time to ditch the cash ISA. Most people won’t pay tax on interest anyway, so using this time to look for higher interest-bearing savings accounts won’t do any harm.
Alternatives to standard savings accounts
First-time buyers aged 18-39 may want to look at a Lifetime ISA where you can save up to £4,000 a year. Once you have had it for a year and use it towards a qualifying first home, you can get a 25% boost on top. This is a rate unbeatable in interest rates anywhere currently. Check out the full terms and conditions to know any cons.
Help to Save accounts for those on universal credit or working tax credits. The UK government’s help to save accounts gives those on a low income the ability to save up to £50 a month. They’ll receive a huge 50% bonus paid after two years (an account can be open for four years). A bonus is paid on the highest amount in the account over the first two years. Therefore, you can withdraw and still qualify for the bonus. If you withdraw any amounts, you will limit the bonus you can achieve for savings over the second (and last) two year period if you wish to continue. A bonus is only paid on the difference between the highest balance then and the first two year period.
When is it good to keep a cash ISA?
Suppose you are close to paying tax on savings interest (we are talking well over £50,000 savings in all likelihood). In that case, the likelihood that interest rates will rise means keeping money in cash ISAs will protect you from tax in the future as your interest returns grow.
This is of most benefit to those in the 40% tax bracket. Those on 20% tax should look closely at the rates paid on the top savings accounts. It’s possible you could find net rates (those after-tax is deducted) can still be higher than cash ISA rates. This differential changes, so keeping an eye will ensure you do what’s best.
Of course, having money to save may be a luxury to some, but doing your best to save money where you can is always good advice, and here we tell you the ideal saving rules to aim for.
With inflation at the level it is at right now – just over 10% in the UK – and possibly rising – cash is depreciating in value so any savings held in cash will be worth way less this time next year.
That doesn’t mean we don’t all need some emergency cash but if you are planning for future security with savings then I do think Cash ISAs are not the place to be.
I agree Jags that Cash ISAs hold little benefit now since tax changes in recent years.
It’s all about finding balance between risk and growing your savings.