But everything changed in 2016, with the launch of the Personal Savings Allowance (PSA). It means:
Basic rate taxpayers can earn up to £1,000 interest a year on any savings without paying tax on them; after that, their interest is taxed at 20%. Higher rate taxpayers can earn up to £500 a year; after that, their interest is taxed at 40%. The most taxable taxpayers do not get a PSA – all their interest is taxed at 45%.
This is a huge amount of mostly non-taxable interest. Even at today’s easy access rate of 1.5% from the app bank only www.chase.co.uk, you would need almost seventy thousand dollars saved to generate £1,000 of ‘interests. This is why the vast majority of people – more than 19 out of 20 – no longer pay tax on savings interest.
All a cash ISA is is a savings account on which you pay no tax.
Today, the main advantage of the cash ISA is that the interest earned on it does not count for the PSA: in addition, it is always exempt from tax. This means that for the few people whose savings (or income) are large enough to exceed this limit, it’s a winner because they can protect more interest from tax.
You get an ISA allowance of £20,000 each tax year and, most importantly, the money you put into an ISA stays tax-free year after year.
Yet, for MOST, there is no benefit to saving in a cash ISA – so you should just focus on getting the highest interest rate. In recent years, cash ISAs have tended to have WORSE rates than normal savings across all categories. At the time of writing…
Best Easy Access: Cash ISA 1.05% v Normal Savings 1.5% Best 1 Year Fix: Cash ISA 1.4% v Normal Savings 1.96% Best 2 Year Fix: Cash ISA 1.75% v Savings normal 2.21%
So most should DITCH cash ISAs for accounts that pay more.
When I recently polled this on Twitter (@MartinSLewis), I found that 85% of the 9,000 people who said they have cash ISAs don’t pay taxes on savings.
So why keep them? I know for years many understood (often by me) that cash ISAs were nicer – but now people need to be deprogrammed and tricked into focusing only on the highest interest rates that come from the highest normal savings. Be brave, ditch the ISA money and earn more.
However, there are a few niche reasons why you might want to keep a cash ISA…
If you are about to pay savings tax. If you have a lot of savings and are close to the limit where you will pay taxes because interest rates are likely to rise, keeping cash in ISAs can protect you from future taxes. You can withdraw fixed cash ISAs (unlike normal fixes). There are big interest penalties for doing this, but if you could get a good fixed rate ISA in cash and wanted emergency access, they are more flexible.
Although cash ISAs are not very reliable for the most part, other ISAs can be.
If you’re a first-time buyer between the ages of 18 and 39, check out the Lifetime ISA. You can save up to £4,000 a year there, and once it’s been open for a year, when used for a qualifying first home (costing up to £450,000) you get an unbeatable boost 25% more. That means there’s up to £1,000 a year of free money. There are pros and cons, however, so it’s worth reading my comprehensive guide to www.moneysavingexpert.com/LISAs.
And if you’re looking to invest, a stock and equity ISA has real tax advantages for many, unlike cash ISAs.
Claim universal credit or working tax credits – get a 50% boost.
Although not an ISA, just one last quick mention for the Help to Save program. This is designed to enable low-income earners to save up to £50 per month, with a 50% bonus paid out after two years.
Basically the bonus is based on the highest amount you had in the account during that period – so imagine you put in £50 a month for ten months, have £500 in it, but need to withdraw it , then you can’t afford it. add more. That’s fine and you’ll still get a £250 bonus at the end (50% of the max £500 you had). To know all the eligibility criteria and to open the account, go to www.gov.uk/get-help-savings-low-income.