Isas vs tax-free savings allowance
From April you will no longer be taxed on a large portion of savings, so do you need to bother with Isas?
From April you’ll be able to enjoy tax-free returns on a large chunk of cash savings, regardless of whether they are in a Isa. So, is there any point continuing to use your ISA allowance?
The dawn of the new tax year on 6 April brings big changes that seriously undermine the unique usefulness of your Isa. The new personal savings allowance means basic-rate taxpayers can earn up to £1,000 in interest on their savings each year before they have to pay income tax. Higher-rate taxpayers can earn up to £500.
A basic-rate taxpayer investing the full allowance of £15,240 would need to be earning interest at a rate of almost seven per cent before they would exceed the allowance need the additional tax-free benefits of an Isa compared to investing in a standard savings account. A higher-rate taxpayer would need to earn over three per cent interest.
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A rate of per cent on a cash Isa is impossible to find at present - indeed accounts paying three per cent are thin on the ground. In fact the best buy for an Isa offering open access at the moment is less than 1.5 per cent with the Post Office, half of what you can get with the Santander 123 current account, which would pay £400 interest in a year after fees.
The case of Isas
In the short-term the new personal savings allowance should lift most people beyond having to pay income tax on their savings interest. But, Isas still have a part to play in long-term savings plans.
Interest rates may be so low the idea of earning hundreds of pounds of interest may seem madness. But, times and interest rates change. Most of us can remember the days before the financial crisis of 2008 when a savings account paying seven per cent interest was entirely plausible. If those days return you’ll suddenly wish you’d been using those Isas for the savings you've accumulated - and which will hopefully be too big to transfer.
A cash Isa gives you long-term protection from income tax without having to worry about whether your savings pot is getting big enough to generate a return of more than £1,000 or £500 a year, or rising interest rates catch you out. So, it could be worth still moving some of your cash into the safety of an Isa occasionally.
Isa your investments
Another area where Isas are still useful is for long-term savings plans. If you are wanting to generate a return on your savings but won’t need the money for more than five years you could get a much better return by looking at investments rather than simply sticking to cash, where rates are currently pitiful. Historically, stock markets have outperformed cash over longer periods.
From April a new dividend allowance is coming in that will mean you can earn up to £5,000 of dividends tax-free each year, but investments that rise in value outside of an Isa will still be liable for capital gains tax. Pop your investments in an Isa and they will be completely tax-free until the day you cash them in.
The new tax rules certainly make life easier for savers and mean you don’t have to do mental arithmetic to see if a cash Isa is paying more than a standard savings account. But, over the long-term Isas still have a role to play.
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