Why it’s important not to dismiss cash ISAs

16th February 2018

A cash ISA used to be the obvious first choice for all savers, as the interest earned is tax free.

Cash ISAs

And in the past, there have been fierce battles to attract cash ISA customers – with best buy cash ISAs often outstripping the rates on non cash ISA best buys – something that savers today will probably find hard to believe.

But, much has happened over the years, in particular the introduction of the Funding for Lending Scheme (FLS) in July 2012 - which prompted best buy cash ISA rates to fall by over 50% - and the Personal Savings Allowance (PSA) in April 2016.

When the PSA was introduced, the Government announced that 95% of savers would no longer be paying tax on their savings. Basic rate taxpayers can now earn up to £1,000 per year tax free and higher rate taxpayers can earn up to £500 per year.

Both the FLS and PSA have had a dramatic impact, reducing both the best buy rates and the popularity of cash ISAs.

Today there is a big gap between best buy cash ISAs and the non ISA equivalents, with the latter often paying far more in gross interest. This means that for many savers who are not paying tax on their savings - as the interest they are earning is within their PSA - there is little incentive to open a cash ISA.

Understandably this has resulted in a drop in cash ISA popularity, but it's important not to simply dismiss ISAs out of hand.

Remember, if you don't use your ISA allowance, it is lost forever as you cannot go back and utilise it retrospectively.

As a result, if circumstances change, for example if interest rates rise, which means your PSA is used more quickly or should the PSA be abandoned, you could end up paying more tax on your savings in the longer term. 

It’s also disappointing that many providers had turned their backs on the humble cash ISA, but it is worth noting that over the last year and due in part to more ‘Challenger Banks’ adding cash ISAs to their range of savings accounts, rates have improved significantly – with best buy rates up by over 48%.

Although there is still a long way to go return to pre-FLS levels, things are moving in the right direction and the gap is beginning to narrow.

For more information on ISAs download our Navigating the ISA maze guide or call one of our savings experts on 0800 321 3581 today.

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