The new tax year brings with it a new ISA allowance of £20,000. So, savers who are already fully utilising their Personal Savings Allowance (PSA) - or are close to doing so - shouldn’t hang around before snapping up the best deals.
As the last week has demonstrated once again, by waiting until the very last minute, the best deals may be taken off the market due to oversubscription or in order to allow time for all the applications to be processed before the year-end deadline. Also, most importantly, you will potentially miss out on a year of tax-free interest.
Is using my cash ISA straight away the best thing to do?
In the past this was a far easier question to answer as, if you were a taxpayer, your choice was either to pay tax on the interest on your normal savings account or to use your ISA allowance and earn tax-free interest in a cash ISA. In this case, it would make sense to earn tax-free interest for as long as possible.
However, since the PSA was introduced in April 2016, for some utilising a normal savings account could reap better rewards in terms of the comparative rates on offer.
This is because some standard best buy savings accounts often pay better gross (before tax) rates than their cash ISA equivalent. And if you are not fully utilising your PSA (so if you earn less that £1,000 in savings interest per year as a basic rate taxpayer – or £500 per year as a higher rate taxpayer) there is less of a reason to choose a tax-free rate that is lower than a gross rate that you will not have to pay tax on.
>> Personal Savings Allowance Factsheet
However, as interest rates rise generally, more people may find that they are either now using up their PSA or are becoming perilously close to doing so. In these circumstances, it may pay to use you cash ISA allowance as soon as possible.
And the good news is that if you shop around, you can actually find cash ISA rates that are very similar to the gross rate on the non-ISA equivalents – especially at this time of year, the so-called ISA season.
For example, the best easy access cash ISAs are paying 1.45% to 1.50% tax free/AER – which is the same as the non-ISA equivalents – so there is no real issue with protecting up to £20,000 straight away.
There is more of a gap between fixed rate ISAs and non-ISA fixed rates, so the decision on when you shelter funds into a cash ISA if this is the route you want to take is a bit trickier.
In summary, whether you should use you cash ISA allowance at all depends on how much cash you hold and how much interest it is earning. And using it early means there is less chance of missing the deadline, as is the case if you leave it until the last minute.
Ultimately, you need to review your personal situation and allow for the possibility that interest rates may increase further, which would then use up your PSA even faster.
And remember, especially if there is a change of government, there is no guarantee that the Personal Savings Allowance would survive, whereas it is more unlikely that the tax-free protection of the ISA would be removed – particularly on existing accounts.
If you need help choosing a suitable cash ISA or have any other queries, please contact one of our savings experts on 0800 011 9705.
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