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... that’s how much we have saved in tax since its 1999 launch. Now read our guide to TODAY’S best paying deals
BRITISH savers have sheltered a huge £35 billion from the taxman in the 20 years since the Isa was launched, Money Mail can reveal today.
Individual Savings Accounts — or Isas — have been handing out tax-free rewards for two decades. They now help us to invest, buy our first homes and save for our retirement and our children’s futures.
Today, in our 20th anniversary special, we can reveal that banks and building societies have finally started to boost rates on their cash Isas in the run-up to the end of the tax year next month.
This is the first sign of life in a market that was dulled by tax changes brought in three years ago. It means savers can now earn as much with a tax-free Isa as an ordinary savings account.
This is a complete turnaround from recent years, during which banks and building societies have paid more to savers in taxable accounts than in their cash Isas.
Tom Adams, head of research at Savings Champion, says: ‘Cash Isas are coming back into their own. The gap has disappeared between the top easy-access taxable account and the best cash Isa rate.’
Back in 1999, the Isa started out as a simple tax-free savings scheme. When it was first unveiled, it was to come with a restrictive lifetime limit of £50,000 tax-free savings.
But, after Money Mail campaigned for the limit to be removed, Britons have since been able to hold on to billions that would have otherwise gone to Her Majesty’s Revenue and Customs (HMRC).
The Government sets a limit on how much money you can put into your Isa each tax year — which runs from April 6 one year to April 5 the next. Any interest earned on this is entirely tax-free.
However, if you do not use your Isa allowance in a tax year, you lose it. You can’t carry it over to the next.
ANNOUNCINGIsas in the 1997 budget, then Labour Chancellor Gordon Brown, said: ‘Through the new Individual Savings Account, we intend to encourage the habit of saving among people who have never saved before.’
After their launch in 1999, Isas grew in popularity and became the first port of call to those looking for a savings account or to put money into the stock market.
By the time they’d been around for ten years, savers and investors were flocking to take them out — opening a huge 15 million in the 2009/2010 tax year.
In the 2017/2018 tax year, around £69 billion was saved into adult Isas — or about £131,000 every minute — and there is currently more than £600 billion sitting in these Isas.
Analysis for Money Mail by investment platform AJ Bell shows that HMRC has since surrendered £35 billion in tax receipts to the Isa over the past 20 years.
The Isa limit was £7,000 in 1999 and has since risen to £20,000.
So a saver who put away the maximum amount since the launch and received an estimated 5 pc return every year, would now be sitting on a pot of £323,931, having invested £206,560.
Laura Suter, personal finance analyst at AJ Bell, says: ‘ During these two decades, as a nation we have put away £874 billion in Isas, both in adult and Junior Isas and split between cash and investment accounts.
‘These people have saved around £35 billion in tax, sheltering their money from both income and capital gains tax. These tax savings will only get higher as more people start to take money out of their Isa accounts to help supplement their retirement income and as people put more money into the accounts each year, now that the annual limit has vastly increased.’
There are more cash Isa deals on offer now than in any past Isa season, with 415 on the market this month, compared with 383 in March last year.
Rachel Springall, finance expert at Moneyfacts, says: ‘The latest Isa season shows great signs of improvement, with the choice of deals breaking the levels seen during the peak in 2018.
‘It is encouraging to see providers fully on board with the Isa season this year, with some launching market-leading rates to grab the attention of keen savers.’
Steve Webb, director of policy at Royal London, says: ‘For too many years, people with modest amounts of savings had tax deducted from the interest that they received. Yet the highest earners could often find ways of paying no tax at all on their savings and investments. The introduction of Isas has meant that ordinary savers now have access to a relatively simple way of enjoying tax-free returns, which is especially important in an era of ultra-low interest rates.’
THE GREAT CASH COMEBACK
CASH Isas alone now hold £ 280 billion — handing out £2.5 billion in tax-free interest per year, based on the average rate paid out by banks and building societies at 0.9 pc.
The top rate on both easy-access taxable accounts and non-taxable cash Isas is 1.5 pc, with big player Santander offering the cash Isa version. The last time that cash Isa rates reached this level was in March 2016.
The gap between one-year fixedrate accounts has also narrowed, though not yet disappeared.
The best one-year fixed-rate cash Isa, with Shawbrook Bank, now pays 1.77 pc, while the top fixedrate bond is Shawbrook’s at 1.97 pc — a 0.2 percentage point difference. This time last year, the gap was double the size at 0.44 points, or 1.46 pc and 1.9 pc respectively.
Cash Isas lost their sparkle three years ago with the arrival of the personal savings allowance following years of rock-bottom interest rates.
The personal allowance lets a basic-rate taxpayer earn up to £1,000 a year in savings income tax- free. Higherrate taxpayers can earn up to £500.
So savers could earn higher rates and still pay no tax just by opening an ordinary savings account, rather than a cash Isa.
In the year before the arrival of the personal savings allowance in 2016, 10.1 million savers rushed to open a cash Isa, putting in an average of £5,801. In the last tax year, this tumbled to 7.8 million, putting in an average of £5,114. Despite the fall, they remain by far the most popular Isa type — with their nearest rival, the stocks and shares Isa, clocking up 2.8 million accounts in the last tax year. Savers have until April 5, the end of the tax year, to use their £20,000 cash Isa allowance for this tax year and earn tax- free interest on their money. On April 6, your cash Isa allowance will be renewed for another 12 months and you will be able to save another £20,000. With a rate of 1.5 pc, you can have savings of £66,000 in a taxable account and earn £ 990 in interest tax-free as a basic- rate taxpayer. However, at 2.5 pc, tax would start to bite once you have saved around £40,000. With a cash Isa, on the other hand, you are protected if your savings grow or interest rates rise. Experts say it is a good idea to use cash Isas even if you don’t bust
your personal savings allowance. There is no guarantee the latter will last, as it could be cut in future years by any government. cash Isas, on the other hand, are more likely to remain untouched. there is a tiny gap of around 0.05 percentage points among the very top payers with accounts on offer now, which translates into just £10 interest a year on the full £20,000. However, while there is little difference in the rates, there are big variations in the terms and conditions behind them. bonus, Some to are make boosted them by look an initial more attractive, while others restrict the number of times you can take money out of your account.
the top 1.5 pc rate from Santander’s eIsa (only available to its 123 World or Select account holders) includes a bonus for the first 12 months.
Once it runs out, you must move your money or you will end up in a dead- end account: your cash is moved into the bank’s Isa Saver easy-access account currently paying just 0.35 pc on balances up to £10,000 and 0.6 pc on larger sums.
Meanwhile, Yorkshire BS pays 1.46 pc on its Single access Saver Isa, but you are restricted to making withdrawals on a single day of the year (you can choose which day). after a year, your money is moved into a lowerpaying account. But we have not included it in the cash Isas: Star Buys table (above) because of its onerous terms.
Virgin Money’s Double take e-Isa at 1.45 pc only allows you to take cash out of your account twice a year.
You can earn 1.45 pc with Paragon or Oaknorth Bank without any complicated terms and conditions.