A revolution in the savings world on April 6, 2016 saw the introduction of the personal savings allowance.
Under this, savers gain a tax-free allowance of £1,000 on the interest earned on their savings, falling to £500 for higher-rate taxpayers. You can earn this much interest without paying anything to the taxman.
Previously, for every £100 of interest paid by a standard savings account, basic-rate taxpayers only received £80, while higher-rate taxpayers got £60.
How do ISAs work?
Estimates suggest around 95% of savers won’t pay any tax on their savings interest using the new allowance. So is there any point to using cash ISAs now? Here are some points to consider.
How much you are saving
You need a hefty sum to make full use of the personal savings allowance. For example, you would need to save £71,000 in an account paying 1.41% to accrue £1,000 interest. Or for a higher-rate taxpayer, £35,500 to receive £500 interest – that’s more savings than most people build up.
However, ISAs are still a useful savings vehicle. From April 2017. these accounts enable up to £20,000 to be saved without being subject to tax.
You can use your personal savings allowance for other savings, and still slot money away into an ISA each tax year. Anything you save in an ISA won’t count towards your personal savings allowance.
Annie Shaw's guide to tidying up your savings and ISAs
Rates are currently low
The Bank of England’s base rate has remained at a record low of 0.5% for more than seven years now.
However, at some stage rates on savings will rise – and the amount saved to use up your personal savings allowance will diminish. That’ll bring cash ISAs back into their own – as a tax-free home for any extra cash above the allowance.
For more information on ISAs as an alternative saving option, please click here.
Special status of cash ISAs
If you pass on sums to your spouse in cash ISAs, their tax-free status remains. However, personal savings allowances cannot be passed on.
Cash ISAs remain tax-free, and you can build on the sums held over the years in these accounts. They could prove very valuable for anyone with larger amounts of savings.
If you have saved the full sum into a tax-free cash ISA since they were first introduced in 1999, you’d have amassed more than £100,000.
Can your spouse inherit your ISA allowance?
Better rates and terms
Of course, you want to save your cash in accounts paying top rates. So check out best buy tables to see which are the best options for your needs.
Often, cash ISAs trump standard savings accounts, making them more attractive for savers.
Consider your tax status
If you reckon your tax situation might shift from basic to higher-rate in the future, cash ISAs could protect your savings.
Higher-rate taxpayers aren’t able to earn as much interest tax-free under the new personal savings allowance. However, savings into a cash ISA earn tax-free interest – whatever your tax band.
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