There have been a number of articles recently, about ISA millionaires – apparently there are now almost 5,000 people who have an average of £1.3 million in a tax-free pot – although according to the financial app Plum, the top 25 ISA investors have an average of £8.8 million!
All of these ISA millionaires are investors, however. Anyone who has always used cash to fulfil their ISA allowance cannot yet have made it to millionaire status, but you may be surprised by just how much you could have squirrelled away from the taxman.
How has the cash ISA allowance changed over the years?
When ISAs were first introduced in April 1999 the total ISA allowance was £7,000. And whilst investors could put this much away into stocks and shares, cash savers could only deposit up to £3,000. In April 2008 the overall annual allowance was increased slightly to £7,200 but the increase to the cash ISA allowance was slightly more – to £3,600, but that was still only 50% overall.
This injustice to cash savers continued until July 2014 when finally the rules changed to allow cash savers to fully utilise their ISA allowance, even if they did not want to invest into stocks and shares. At this point the overall allowance had increased to £15,000.
Today, of course, the allowance is £20,000 as it has been since April 2019 – and as announced in the Autumn Statement this year, it is set to remain so until at least 2030.
How much might you now have in a cash ISA?
If you had deposited the maximum amount into a cash ISA since their inception in April 1999, you would have deposited £261,520! If you had earned an interest rate equivalent to base rate over that time, the overall balance protected from the taxman could be almost £310,000. In fact, as for much of that time the interest rates available on the top ISAs were far higher than the base rate, you could be sitting on even more! For example, in March 2012 when the base rate was just 0.50%, you could have opened a 1-year ISA paying 3.50%!! So the overall balance could be far higher.
Mind the gap?
One aspect of cash ISAs that is regularly criticised, is that the rates on the top ISAs are often far lower than the before tax rate of the top fixed rate bonds.
The gap between best buy standard accounts and cash ISA equivalents really became more of an issue following the introduction of the Personal Savings Allowance (PSA) in April 2016. At that point the Government announced that 95% of savers would no longer pay tax on their savings accounts, as the interest they earned would be less than the PSA of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. As a result, cash ISAs seemed to fall out of favour with savers and providers alike and rates started to suffer.
But the good news is that this gap has narrowed more recently and in any case it’s about what you can earn after tax has been taken into consideration that’s important.
Whilst the ISA rates look as though they are paying less than the bonds, especially on the fixed term accounts, you need to consider what the after-tax rate would be on a bond, if you are already fully utilising your Personal Savings Allowance and therefore pay tax on your savings. For example, although the top fixed term bond rate currently on offer is 4.80% with Ziraat Bank (via Raisin), after the deduction of basic rate tax, the net rate is 3.84% - so on £20,000 you would take home £768. However, although the top 1-year ISA with Castle Trust Bank is paying a lower rate of 4.52%, as this interest is tax free, you’d take home £904 instead!
Don’t forget your old ISAs!
We often focus on making sure we pick the top rates with any new cash that we are looking to deposit, but it’s arguably more important to make sure your older accounts aren’t falling behind – or have been left to languish in a poor paying account once a bonus has ended or an account has matured. If you have built up a larger amount in your cash ISAs, have you gone over the Financial Services Compensation Scheme limit of £85,000 per banking licence?
With rates relatively buoyant at the moment, now is the time to review all your old accounts and switch if you are not earning as much as you should be, or can tie some up before rates start falling again.
But remember the golden rule of switching your ISA. You must approach the new provider and complete a transfer form. They will then request the funds from your old provider. If you simply cash in an old ISA, you could lose that previous valuable ISA allowance.
While cash ISA savers might not have hit the millionaire status of their investing counterparts, the benefits of consistent saving and tax-free interest are clear. Over time, the allowances have increased, and the potential for building a significant pot—protected from the taxman—has grown with it. Cash ISAs remain an essential tool for savers looking for tax efficiency, especially for those who exceed their Personal Savings Allowance and the narrowing gap between cash ISA rates and standard savings accounts has helped boost their appeal once more – pushing rates to be more competitive.
In a world where interest rates and savings products change rapidly, the golden rule is to stay proactive. By keeping a close eye on your accounts and regularly reviewing your options, you can make sure that your savings are always working as hard as they should be—tax-free and optimised for your financial goals.
@savingschampion
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