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Personal savings allowance: Are cash ISAs still worth it?
Published 29 April 2016 by Emily Bancroft
You can save tax-free anyway – so what’s the point of an ISA?
Since April this year, you can now earn £1,000 in savings interest tax-free if you’re a basic rate taxpayer. Before this, you paid income tax on your savings interest if you earned more than the tax-free Personal Allowance in a year. This is because savings interest counts as income.
Now, thanks to the new personal savings allowance, you probably won’t pay any tax on your savings interest unless you’re saving quite a lot of money. So is there any point in saving in a tax-free account like an ISA or are you better putting your money in a standard savings account? Let’s take a look at your options.
If you’re a basic 20% rate taxpayer and you have a personal savings allowance of £1,000, this will probably cover all of the savings interest you make. In real terms, imagine you had an account at 2% AER. You’d need £50,000 before you paid any tax on your savings interest – and most savings accounts are well below that at the moment.
So why would you need a cash ISA if your savings interest will be tax-free anyway? Well, ISAs do still have some benefits over regular savings accounts. For one, you can leave your cash ISA to your spouse in your will and they can inherit your ISA allowance. If you die, they won’t get your personal savings allowance.
Cash ISAs could also be a better option because they stay tax-free for the long term. If savings rates go up to the level they were at before the financial crisis – 6%, for example – it would take just £16,700 to take you over the £1,000 personal savings allowance limit.
Another reason why a cash ISA might be better is if you start earning more in the future and you become a higher rate taxpayer. This means you’ll have a lower personal savings allowance of just £500. An ISA would protect against this.
Choosing an account
When you’re deciding on an account for your money, it’s worth looking for accounts with the best returns. You might find that some ISAs offer higher interest rates than some of the easy-access savings accounts – so you might be better off with a cash ISA after all.
You could also look at fixed-rate savings accounts, where you lock your money away for two or three years. These can offer higher interest rates than some cash ISAs or regular savings accounts.
However, it depends whether you need easy access to your savings. If you have an unexpected bill – say your car breaks down and needs emergency repairs – would you need your savings for this? If you would, you’re probably better off keeping your money in an account you can access easily – or you might have to pay a fee to get to your cash.