Our Member Services Manager, Bev Jesse, takes a look at ISAs in her blog below.
As the end of the tax year approaches and the start of the new one looms, it’s at this time of year we’re frequently asked by savers about ISAs and if they are still worth having. So, let’s have a look at ISAs and whether they are something you should be utilising in order to make the most of your hard-earned cash.
What is an ISA?
In a nutshell, an ISA is a savings account you don’t pay tax on. It works in the same way as a traditional savings account, but you do not pay tax on any interest that you earn.
How much can I save in an ISA?
Each tax year, the Government sets an ISA allowance which states the maximum amount you can save within the tax-free time frame – this runs from April to April. You can save up to a maximum of £20,000 and this can be in a Cash ISA, a Stocks & Shares ISA, an Innovative Finance ISA, a Help to Buy ISA, a Lifetime ISA or across a mixture of all of them. However, your tax-free ISA savings for the tax year can’t exceed £20,000 in total.
Savings should be deposited by 5 April each year as the tax-free allowance doesn’t roll over. Any savings which stay within the ISA will continue to earn interest and remain tax free indefinitely until you withdraw the money.
Personal Savings Allowance
The introduction of the Personal Savings Allowance (PSA) in April 2016 means people can earn up to £1,000 in tax-free interest on their savings held in traditional savings accounts, depending on their tax bracket. For example, if you’re a basic-rate tax payer earning between £11,500 - £45,000 in the 2018/19 tax year, you’ll receive the full PSA of £1,000. If you’re a higher rate taxpayer, paying tax at the 40% rate with an income of between £45,001 - £150,000, you’re entitled to a PSA of £500.
With PSA in mind - does this mean that ISAs have limited value?
No. The main thing to remember is that ISA interest doesn't count towards your PSA - you can earn it tax-free and still have your full £1,000 (or £500) allowance. This means there are great advantages of having an ISA in addition to a traditional savings account.
Whilst the PSA means there are benefits to holding savings in other accounts, keep in mind that when you use a regular savings account, you'll have to pay tax on the interest. Basic-rate taxpayers have to give 20% of the interest above their £1,000 PSA earned to the Government and for higher rate taxpayers, it's 40% above their £500 PSA.
ISAs offer long-term tax saving benefits, especially when looking to build up a substantial pot over time. In 2015/16 you could have saved £15,240, in 2016/17 £15,240 and in 2017/18 £20,000 - so that’s a massive £50,480 tax-free to see in your account, and that’s before any interest.
Traditional savings accounts will not allow you to do so with as much of a tax-free allowance.
Choosing an ISA
Like what you hear about ISAs and want to find out more about how you can save with one? As per regular savings accounts, ISAs are available from most building societies and banks and you can shop around for an ISA to meet your needs by using a comparison site. What’s more, with certain types of Cash ISAs, you’ll have instant access to your money – making it a flexible way to manage your finances should things change.
If you pay income tax and are looking for a savings process that is simple and stress free, one of our Cash ISAs could be right for you. Click here to find out more