Traditionally, whenever you save money into a savings account, you were charged income tax on the interest your cash made. This is because savings interest is classed as income so if you earned more than the tax-free Personal Allowance in a year, you paid tax on savings interest. If you wanted to get your savings interest tax-free, you had to save into an ISA but there are limits on how much you can put into one of these accounts.
Since 1 April, that’s changed – you can now earn up to £1,000 in savings interest without paying any tax. For most savers, this means they won’t pay any income tax on savings interest.
Since 1 April
Before the changes came into force, you would pay income tax on your savings interest at the same rate you paid on the rest of your income – so if you pay tax at the basic rate of 20 per cent, your savings interest would also be taxed at 20 per cent. That means that if you had an account that was earning £100 in interest, you’d lose £20 of this.
This time last year, Chancellor George Osborne announced a new personal savings allowance, meaning savers can now earn up to £1,000 in savings interest before they have to pay any income tax on this – and this change came into force on 1 April. In real terms, if you had a savings account paying 2% interest, you’d have to save £50,000 before you were earning £1,000 in savings interest. This means that for the majority of savers, they won’t have to pay any tax on their savings interest – at least until interest rates start to rise.
ISA or no ISA?
Of course, this seems like there’s not much point in saving into a tax-free account like an ISA anymore if your savings interest is going to be tax-free anyway. However, an ISA might still be the best deal for your savings, as some ISAs will offer better returns than easy-access cash savings accounts.
If you don’t need access to your money immediately, you might be able to get a better rate by locking your savings away for a year or two in fixed-rate savings accounts – look into these accounts to see which offers the highest interest rate. However, if you need to be able to get to your savings quickly in an emergency – if you have an unexpected bill for example – it might not be worth going for a fixed-rate account, as you could have to pay a fee to withdraw your money.
For couples, ISAs also have an extra bonus. You can inherit your spouse’s ISA if they die and there’s no inheritance tax charged on this so if this is something you worry about, it’s worth considering sticking with ISAs.