Q: Should I ignore my Cash ISA allowance now the new Personal Savings Allowance is being introduced in the new tax year?
Unfortunately, there are already signs that the impending Personal Savings Allowance (PSA) may have rung the death knell for the cash ISA, as it will mean tax free interest for many savers in non ISA savings accounts.
From 6th April this year, the new PSA will mean that for basic rate taxpayers, the first £1,000 of interest earned on their savings will be tax free. For higher rate taxpayers, it’ll be the first £500. However, it is worth noting that the amount needed in an account before you breach the Personal Savings Allowance will reduce as and when interest rates rise, whereas the interest from a cash ISA will remain tax free regardless of the amount.
Currently, savers in the best easy access account, paying 1.45% gross/AER (Freedom Savings Account from RCI Bank) will breach the PSA with more than £68,965 for a basic rate taxpayer, or £34,482 for a high rate taxpayer. If rates were to rise then these amounts would fall, which could see those savers who have ignored ISAs, paying more tax then they need to.
Cash ISAs do not count towards your Personal Savings Allowance and by not using your cash ISA allowance you may be reducing the amount you can save overall tax free in the future. So cash ISAs should still be considered as part of your overall savings strategy.