The ISA year end is nearly upon us. And if you don’t use your allowance to save tax-free you lose it. Yet while in the past our Money Saving Expert Martin Lewis, would be going bat-crazy to get you to put savings in there, he’s quite calm about it these day. So we ask him is an ISA still nicer, and where’s the best place to save?
Most important before we start is everyone who has savings needs to check the rate that they’re getting. Even if the account paid a decent whack when you opened it, it’s likely paying diddly squat now – many are just earning a fraction of one percent and even though the best rates aren’t great, some could increase their interest by over 10 times.
What’s an ISA?
A cash ISA is just a savings account you can (now) put £20,000 a tax year in, and the interest is tax-free. The £20,000 allowance renews on 6 April, so if you don’t use it before then, you’ll lose it (though get another one, meaning you could save £40,000 in an ISA over the next few weeks). While this used to be a huge boon for savers, since April 2016 I’ve been shouting less about putting money into an ISA.
That’s because in April 2016 the Personal Savings Allowance (PSA) was introduced, which now means taxpayers can earn a certain amount of interest on their non-ISA savings tax-free. The allowance taxpayers get depends on their tax band…
- Basic 20% rate taxpayers can earn £1,000/yr tax-free (equivalent to interest on £66,000 at the top easy-access rate).
- Higher 40% rate taxpayers can earn £500/yr tax-free (equivalent to interest on £33,000 at the top easy-access rate).
- Top 45% rate taxpayers (ie, those earning £150,000+/yr) don't get a PSA.
This means 95% of people no longer pay tax on savings interest, so the primary boon of an ISA being tax-free is less relevant.
So should everyone just forget ISAs?
No, not everybody. Obviously there’s those who earn interest over the threshold, and then ISAs can save them a chunk of tax.
However it’s also worth remembering that if interest rates increased to old levels, so savings paid more, you’d earn £1,000 on far smaller amounts of money. For example, at 5% then £1,000 interest is earned on £20,000. So those with more than that may want to keep an eye on whether it’s worth putting some in ISAs.
The real key is all about the interest rates; the problem for the last few years has been that ISA savings rates pay far less than normal savings.
- Top easy access: The top normal savings is 1.5% AER (includes a fixed 0.15% bonus for 12 months)variable from Marcus Bank, and you can save from £1.
Currently the top cash ISA open to all is 1.45% fromParagon Bank (min £1). This is a much smaller gap than usual so the cash ISA isn’t bad – it’s only 60p per £1,000 per year less interest. So for those at the cusp of earning interest on your savings and think you might pay tax on interest in the future it’s worth saving in here.
Or if you have its 123 current account you can get 1.5% easy-access ISA from Santander – the same rate as top easy-access Marcus Bank; so if you bank with Santander it’s worth grabbing it and putting your money in there.
- Top fixed savings: This is where you effectively lock your cash away without access in order to get a guaranteed rate, and earn more (though with cash ISAs you can get some access).
The top 1-year fixed normal savings is 1.97% fromShawbrook Bank, and it’s also paying the highest 1-year fixed cash ISA rate at 1.77%. The top 2-year fixed normal savings is 2.28% from Union Bank of India UK, while the top 2 year fixed cash ISA is 1.95% from Charter Savings Bank.
As you can see here, you’d really want to stick with normal savings as the difference is bigger, unless you’re actually paying tax on a proportion.
Are there any other places to save?
There are several other high-interest accounts around.
- Help to Buy or Lifetime ISA:These ISAs are specifically designed for first time buyers and is a no-brainer. When you save in it the Government adds a 25% bonus on top – up to £3,000 with a Help to Buy ISA and up to £32,000 with the Lifetime ISA. They both have different criteria and advantages/disadvantages, so you’ll have to choose which is best for you. Do your reading first before you apply.
- Regular savers:These are high interest accounts letting you earn up to 5% but only on up to around £300 a month. The top ones are linked to current accounts. If you’ve got a First Direct, HSBC, M&S or Nationwide current account, see if one’s available to you.
- High-interest current account. A number of banks pay loss-leading interest on current accounts to get you to switch (you need to pass a not so harsh credit check). The top ones are Nationwide FlexDirect which pays 5% on £2,500 for the first year (after it drops to 1%). You need to pay in £1,000/month. And TSB Classic Pluspays 5% on £1,500. You need to pay in £500/mth and register for online banking.