Why wait to earn tax-free interest?

07th April 2018

It always surprises us just how many savers leave putting money into a cash ISA until the end of the tax year, missing out on a whole year’s worth of valuable tax-free interest. But the last-minute dash to apply and boost in the number of account openings in the run up to the end of the tax year speaks volumes. Whilst the cash ISA market has certainly changed over the last few years, there is still a place for cash ISAs as part of an effective savings plan.

Back in 2012 and 2013, best buy cash ISA rates usually paid far better rates than the non-ISA equivalents – but as rates tumbled following the introduction on the Funding for Lending Scheme, cash ISAs lost some of their shine and for the next few tax years there was a distinct lack of interest in them amongst providers  – the competition just didn’t happen as it had in the past. This was due in the main to the fact that challenger banks tended not to offer cash ISAs as part of their savings range – so the competition that was apparent elsewhere, simply didn’t extend into the cash ISA market.

But that has certainly changed over the last 12 months, as more new names entered the cash ISA market, with challenger banks - such as Charter Savings Bank, Paragon and OakNorth Bank - regularly appearing in our best buy tables. Hopefully this trend will continue and more providers will take part in the cash ISA race in the future.

As well as an increase in new names, pushing best buy rates up, the appearance of some of the UK’s largest savings providers at the very end of the tax year was a further indication that things could be different this year.

Nationwide launched its Single Access ISA paying 1.30% tax free/AER (1.40% tax free/AER for existing members) and Halifax even made a surprise appearance with its market-leading five year fixed rate ISA, paying 2.25% tax free/AER.

Over the last six months, we have also seen the gap narrow between the best rates on offer on standard accounts and cash ISAs. Even though rates on non-ISA accounts are still higher, after tax has been deducted, it can be a very different story, with higher and additional rate taxpayers particularly vulnerable.

So, especially with the gap narrowing, why wait to use your ISA allowance? You could miss out on valuable tax-free interest and have to go through the usual panic of making sure you use the allowance before the deadline.

 

Which ISA to choose?

Deciding where to place your £20,000 ISA allowance is not necessarily straightforward. Before you begin, you need to decide whether to place your funds in a cash ISA, a stocks and shares ISA, an Innovative Finance ISA, a Lifetime ISA (for 18 to 40 year olds) or a combination of the four types. For more information about the different types of ISA download our Navigating the ISA maze guide

For those looking at cash ISAs, there is a further complication in the form of the Personal Savings Allowance (PSA). Launched in April 2016, the PSA means that basic rate taxpayers do not pay tax on the first £1,000 of savings interest they receive or £500 for higher rate taxpayers.

The introduction of the PSA led some to question the point of cash ISAs for tax-free savings, however cash ISAs remain an important part of a balanced savings portfolio.

Cash ISAs do not count towards your Personal Savings Allowance and by not using your cash ISA allowance you are reducing the amount you can save overall tax free in the future, so should still be considered as part of your savings strategy.

With this in mind, looking at the top cash ISA rates available is a great place to start when deciding where to put your 2018/19 allowance and there are a range of different options to choose from, depending on your individual circumstances.

For those who need easy access to their cash, the top rate on offer is from Nationwide (1.30% tax free/AER) - as previously mentioned. However, this account is restrictive, allow just one withdrawal a year, so for a much less restrictive option, Shawbrook Bank is next best at 1.25% tax free/AER

 

For more information on these accounts and for other options, please refer to our Variable Rate ISA Best Buy Table.

If you're happy to tie your money away for a set term, fixed rate cash ISAs can offer higher rates. There are various terms available ranging from one to five years, so you can choose a term that suits you. Aldermore currently dominates the shorter-term market with market leading rates for 1 year (1.50% tax free/AER), 2 years (1.70% tax free/AER) and 3 years (2.00% tax free/AER). For those looking for a longer five year term, Halifax offers the top rate at 2.25% tax free/AER.

For more information and options, please take a look at our Fixed Rate ISA Best Buy Table.

You can also invest for your child in a Junior ISA this tax year. Up to £4,260 can be invested in the 2018/19 tax year, with competitive rates featured in our Junior ISA Best Buy Table.

Don’t forget, now is also a good time to review your current cash ISAs and consider transferring to a better option, if the interest rates you are receiving are not competitive. Ensure you approach the new provider with your transfer request and they will take care of moving the funds for you. However, please bear in mind that not all accounts allow transfers in, so make sure you read the information carefully or contact us for assistance.

 

If you need help picking a suitable cash ISA or need any assistance with your savings, call us on 0800 011 9705, we’d love to hear from you.

 

 

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