Since 1999, the ISA has been the best way to save your money free of tax.
However, this tax year you can take advantage of the Personal Savings Allowance, which for many may compete with your usual cash ISA. Starting on the 6th April 2016, the Personal Savings allowance allows you to use your savings account to earn up to £1,000 of interest before you pay tax.
This interest includes any savings from bank accounts, savings accounts, credit union accounts, building societies, corporate bonds, government bonds, gilts, Peer-to-peer lending and Interest distributions from authorised unit trusts, open-ended investment companies and investment trusts and most types of purchased life annuity payments. Although it must be noted dividend income or distributions are not included.
The amount of interest that you can earn before you pay tax depends on the tax rate you pay:
Basic rate: £1000 of interest with no tax
Higher- rate: £500 of interest with no tax
Additional-rate: £0
So, if you are a basic rate tax-payer with the top easy access savings account you can earn interest tax free on almost £75,000.
Yes, unfortunately additional rate tax payers do not get this allowance and will have to continue to pay the 20% rate of tax. However, it is estimated that 95% of savers will no longer pay tax on any of their savings. It will also mean no more tax returns, which could lead to confusion for HMRC over the taxes that do need to be paid.
If you look around at some of the savings interest rates available particularly on current accounts, some people might be wondering whether they need an ISA. A good ISA savings interest rate is around 1.5%, with the best fixed savings ISAs offering up to 2%. The easy access savings accounts and fixed rate savings account are very similar to these ISA rates. However, there are some very good deals on current account savings.
One example is the Santander 123 account, which is proving very popular and offers 3% on up to £20,000. There is a £5 fee and you have to set up direct debits, but you will also earn 3% cashback on your household bills. This means that if you are wise with the account you can earn over £530 a year in interest in addition to your cashback.
There are many other generous bank accounts out there that offer rates of up to 5%, which is triple most easy access ISA limits, but they tend to have restrict the amount that you earn 5% at. Technically, a basic rate tax payer could open numerous accounts that have the best savings rates on the market and strategically move their money around to make the most of their tax free allowance. There are people who actually earn their living by doing this! But it isn’t something that we would recommend.
The amount of people taking out an ISA has grown year on year in the past, but with the introduction of the Personal Savings allowance we could see a decline this year.
This begs the question, is there a need for the ISA anymore?
If you can afford to take max out your Personal Savings Allowance, then it would be a good idea to have an ISA to take advantage of the additional £15,240. However, a large percentage of people on the basic and potentially higher tax rate won’t be in the position to make the most of the personal savings allowance.
Even with this in mind savers should still be considering an ISA, as there is no guarantee that this Personal Savings allowance is a long term option. The boundaries of the allowance could be moved or it could even be abolished altogether leaving you liable for tax on savings. In addition to this most current accounts require you to deposit a minimum amount each month of around £1,000 and above, which is another circumstance that could change.
For these reasons it is a good idea to keep an ISA open for the long term protection, especially when the allowance is increasing to an all-time high of £20,000 in 2017. There is no real answer to which one is better, so the best option is to have one of each preferably at the best saving rates. If the ISA uptake does begin to decline dramatically, we could even see an improvement in ISA savings rates.
There is no doubt that with the current savings rates available, we should all take advantage of the Personal Savings Allowance if we can afford the savings. Although, one thing we will say is to be mindful that the extra income earned from any interest could push some basic and higher tax payers to the next tax band. You might also be planning on moving up an income bracket in the future, which could mean that making provisions for the Personal Savings Allowance may not suit you. Please call us for any advice if you feel that you might be in this situation.
