Got a cash ISA? Maybe it’s time to ditch it
PRESS the rewind button and go way back to April 2015. I was on TV at the time urging savers as usual to use their new tax-free cash ISA allowance – because ‘money was nicer in an ISA’.
Everything changed in 2016, when the Personal Savings Allowance (PSA) launched. It means: Basic 20% rate taxpayers can earn up to £1,000 interest a year from any and all savings without paying any tax on it; after that their interest is taxed at 20%.
Higher 40% rate taxpayers can earn up to £500 a year; after that their interest is taxed at 40%.
Top 45% taxpayers don’t get a PSA – all their interest is taxed at 45%.
All a cash ISA is, is a savings account you don’t pay tax on. These days, its main boon is interest from it doesn’t count towards the PSA: it’s still tax-free on top of that. That means for the few with savings (or earnings) big enough to break that limit, it’s a winner, as they can protect more interest from tax.
You get a £20,000 ISA allowance each tax year, and money you put into an ISA stays tax-free year after year.
Yet for MOST, there’s no benefit of saving in a cash ISA. Over the last few years, cash ISAs have tended to have WORSE interest rates than normal savings across all categories. At the time of writing…Top easy access: Cash ISA 1.05% v Normal Savings 1.5%
Top 1-year fix: Cash ISA 1.4% v Normal Savings 1.96%
Top 2-year fix: Cash ISA 1.75% v Normal Savings 2.21%
Yet rates change daily so for my latest updated best buys see moneysavingexpert.com/topsavings and moneysavingexpert.com/cashisa.
I know for years many had it drilled into them (often by me) that cash ISAs were nicer – but now people need deprogramming and pushed to focus on the highest interest rates which come from top normal savings. Be brave, ditch the cash ISA and earn more.
However, there are a few reasons you may want to keep a cash ISA...
If you’re close to paying tax on savings. If you’ve a good whack of savings and are close to the limit where you’ll pay tax, as interest rates are likely to rise, keeping money in cash ISAs now can protect you from future tax.
You can withdraw from fixed cash ISAs (unlike normal fixes). There are big interest penalties for doing so but, if you could get a good cash ISA fix rate and wanted access in an emergency, they are more flexible.
While cash ISAs aren’t much cop for most, other ISAs can be. If you’re a firsttime buyer aged 18-39, check out the Lifetime ISA. You can save up to £4,000 a year in it, and once it has been open a year, when used towards a qualifying first home (one costing up to £450,000) you get an unbeatable 25% boost on top. That means there’s up to £1,000 a year of free cash. Read my full guide at moneysavingexpert.com/LISAs.
And if you’re looking to invest, a stocks and shares ISA does have actual tax benefits for many, unlike cash ISAs. ■