Cash ISAs under threat? What the Budget could mean for your savings
The Chancellor is reportedly considering reducing the amount savers can put into cash individual savings accounts (ISAs) each year, prompting many savers to rush to protect their interest from tax.
Under current rules, you can save up to £20,000 every tax year into tax-efficient ISAs, either into cash, stocks and shares or innovative finance, where your money goes into peer-to-peer lending. Alternatively, you can split your allowance across a combination of these options. Any returns from ISAs are free from income tax and capital gains tax and do not have to be declared on your tax return.
However, there is growing speculation that the Chancellor Rachel Reeves may look to restrict the amount that can be put into cash ISAs to £10,000 rather than £20,000, in a bid to encourage savers to consider investment ISAs instead.
Chris Irwin, director of savings at Yorkshire Building Society, said: “Savers have spent years earning next to nothing on their money. Now, ISAs are helping them rebuild - offering everyday people a fair, tax-free return on their savings. But just as they’re starting to find their feet again, many are worried about the creeping hand of tax on their hard-earned interest.”
Here, we explain who cash ISAs are most useful for and, if you’re considering using this year’s £20,000 allowance before this year’s Budget on November 26, which accounts currently pay the most competitive returns.
Who are cash ISAs suitable for?
If you only have a very limited amount of savings, cash ISAs aren’t likely to be of much benefit, unless you’re a higher or additional rate taxpayer. That’s because if you’re a basic rate taxpayer, you’ll benefit from a £1,000 Personal Savings Allowance, which means you can earn this amount of interest on your savings each tax year without having to pay any tax on it. If you’re a higher rate taxpayer, this Allowance reduces to £500, but if you’re an additional rate taxpayer, you won’t get a Personal Savings Allowance at all.
Cash ISAs are popular with all taxpayers who don’t want to take any risks with their savings.
“Ultimately, the Government has a goal to stimulate growth, but they must not penalise savers who have no desire to invest,” said Rachel Springall, Finance Expert at Moneyfactscompare.co.uk. “It’s vital that they tread carefully with any reforms and ensure they review the financial education surrounding investing to protect consumers.”
Which cash ISAs pay the highest returns?
Cash ISA rates are changing all the time, but at the time of writing, the best easy access cash ISA was from the Trading 212 app, paying 4.53% annual equivalent rate (AER) on a minimum deposit of £1. This rate includes a 0.66% bonus for the first 12 months, so you may want to move your money once the bonus disappears.
Other competitive cash ISAs include Moneybox app’s cash ISA, which pays 4.52% AER on a minimum deposit of £500. This rate also includes a bonus of 0.82% which is payable for a year, and Bank of Ireland’s Online ISA Easy Access Issue 39 account, which pays 4.16% on a minimum opening amount of £100. This rate includes a 3.16% bonus for the first 12 months.
If you’re happy to tie your savings up for a while, you might want to consider a fixed rate cash ISA. Vida Savings’ 1 Year Fixed Rate ISA offers a leading 4.28% AER monthly or on the anniversary of account opening, following a rate increase. Savers can open this account online with a deposit of £100 or more, which they can add to for 21 days after opening. If you’re looking for a longer-term fixed rate ISA, UBL Bank pays 4.22% AER on its 5 Year Fixed Rate cash ISA, with can be opened with a minimum £2,000 deposit.