It’s the season for Isa adverts. “Save with us taxfree!” they say. But often you’ll do better to ignore them and save your money in an ordinary savings account – and still pay no tax on the interest.
Savings rates change frequently, so those in this column probably will have shifted – hopefully upwards – by the time you read it, but the principle will stay the same. Isas are a cloak of invisibility that wraps around your money and hides it – and the interest it earns – from the taxman. When they were devised in 1999 they were the only way to save tax-free. Bank and building societies deducted tax from your interest automatically, and if your income was too low to pay tax you had to claim it back. So Isas and their wizard’s cloak seemed a magical way to avoid hassle as well as tax.
But, since 2016, tax is no longer deducted from savings interest and everyone has a personal savings tax allowance. That means up to £1,000
of interest earned on any account is tax-free (for higher-rate taxpayers the allowance is £500). For most people those amounts are sufficient to cover any tax that might have been due on savings interest. So unless you have more than around £60,000 in taxable savings, or pay higher-rate tax, Isas are no longer much use. Worse than that, they can cost you money.
Isas pay lower returns than ordinary savings accounts, so that cloak of invisibility comes at a price. Currently the best instant access Isa is the Ecology Cash Isa, paying 0.8%. But the top non-Isa account is the new Chase Saver, which pays 1.5%. That brings a better return even if you have used up your savings allowance and pay 20% tax on the interest.
It works the same for one-year bonds: Leeds Isa (issue 163) pays 1.3%, but the Tandem One-year Fixed Saver returns 1.8%, which is worth more even if you pay basic rate tax on it.
If you’re tempted by cash Isas, check out best buys at savingschampion.co.uk. But make sure you don’t pay for Isa needless invisibility. It usually isn’t worth it.
Paul Lewis presents Money Box on Radio 4.