Thinking of ditching your ISA? You might want to think again

21st April 2016

The Personal Savings Allowance has brought the benefits of saving into a cash ISA into question, not least because for basic rate taxpayers the amount you can now have in traditional cash savings before you start paying tax is more than £68,000, based on the current best easy access interest rate of 1.45% with market leader RCI Bank.

Current accounts look even more appealing, paying up to 5% with TSB's Current Plus Account and Nationwide's FlexDirect Current Account, albeit on small balances, and 3% with Santander's 123 Current Account on balances between £3,000 and £20,000, all potentially tax-free. 

While the rates on cash ISAs may be nothing to get overly excited about, paying up to 1.65% for easy access or 2.50% fixed for up to 5 years, you may not want to discount them as there are more reasons than just the interest rate to still use them:
 

  1. Inheriting ISAs – You may not have realised this but since December 2015, when your spouse or civil partner dies, you can now inherit their ISA allowance that they had built up and therefore benefit from the tax-free interest that you may have both depended on. Bear in mind that not all providers are participating so do give us a call if you need any help.
  2. You will pay no tax on your interest – Cash ISAs allow you to have the interest paid free of tax, no matter whether you are a basic, higher or additional rate taxpayer. While that might not seem too exciting when interest rates are low, as they start to rise, the amount of money you are losing may increase, if you are not saving through an ISA. 
  3. You can get a 25% savings boost from the Government if you qualify – Yes, if you choose to have a Help to Buy ISA to buy your first home now – or plan to have a Lifetime ISA from April 2017 – then you can get some tasty bonuses paid by the Government. Let’s face it, where else can you get 25% return on your savings? With a Help to Buy ISA, you will get a bonus of £50 for every £200 you save, up to a maximum of £3,000 a year from the Government. So the most you should have in a Help to Buy ISA is £12,000 with £3,000 added by the Government. The Lifetime ISA – which can incorporate the Help to Buy ISA when launched – could be more generous over time even though the bonus will also be 25%. You can save up to £4,000 a year into this ISA and get a cash bonus of 25% from the Government – meaning up to £1,000 a year. These will be open to people aged between 18 and 40 and the bonus on the amount deposited each year will be added annually until you reach 50. The money can only be used to buy your first home or be accessed at age 60 when you can use the money for retirement.
  4. You do not need to declare ISA savings on your tax return – Since cash ISAs provide you with tax-free savings, there is no need to add the amount you have in these accounts to your tax return.
  5. The amount you can legitimately shelter from tax is rising – because the amount you can put into an ISA of any sort this year is £15,240, rising to £20,000 next year.

While interest rates are low, it is easy to think of cash ISAs as something of a dying breed and the providers are not helping things either with a dearth of new launches. But it is a question of demand and supply, if savers demand them, they will provide them – so make sure you don't dismiss your ISA allowance this tax year, it could potentially be very short sighted.

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