Why it’s still worth saving with cash

CASH Isas have lost some of their sparkle after a decade of low interest rates and the arrival of the personal savings allowance in 2016.

But now that all savings accounts are paying paltry rates, the cash Isa’s tax-free guarantee looks appealing once again.

Some 7.7million savers opened a cash Isa in the tax year to 2018, putting in an average of £5,114, government figures show. This compares with 2.8 million opening a stocks-and-shares Isa.

Four years ago, before the introduction of the personal savings allowance, more than ten million savers a year rushed to buy a cash Isa and receive tax-free interest on their savings. Now, the personal savings allowance lets a basic rate taxpayer earn up to £1,000 in interest taxfree from an ordinary savings account outside an Isa; higher rate taxpayers can earn £500.

Even with an interest rate of 1.5pc, a basic rate taxpayer could have £65,000 in a taxable account and pay no tax on the £975 annual interest — so savers found they can earn more taxfree interest in an ordinary account than in a cash Isa. But interest rates are still low — and falling. Yet the gap between taxable and taxfree accounts has narrowed and, in some cases, all but disappeared.

Anna Bowes, co-founder of Savings Champion, says: ‘Those who are close to or who have breached the personal savings allowance should make the most of their Isa allowance, as the interest is tax-free — always.’

Even if you are not that close to using all of your £20,000 allowance, Isas could still be worthwhile.

Patrick Connolly, from advisers Chase de Vere, says: ‘For many, it won’t make much difference whether your money is in an Isa or not. But by putting it in an Isa, you know it will always be tax-free. Whereas the Government can tamper with the personal savings allowance at any time.’

In an Isa, you can be sure that if and when rates eventually do rise, you won’t have to pay tax or even declare it to HMRC.

Virgin Money Double Take e-Isa pays 1.31 pc — the same rate it pays on its taxable account. Paragon and Shawbrook banks also pay the same — 1.21 pc — on both.

Kent Reliance pays 1.2pc on its ordinary account and 1.15 pc on its Isa. The difference of 0.05 percentage points means just £10 interest a year on a £20,000 sum.

On fixed-rate deals the gap is slightly wider. The best one-year cash Isa rate is 1.36pc from Virgin Money. The top one-year bond pays 1.55pc. The 0.19 percentage point difference means £38 in lost interest on the full Isa allowance, or £1.90 on each £1,000.