Don’t abandon cash Isas

People are abandoning cash individual saving accounts (Isas) in their droves since the introduction of the personal savings allowance. A total of £1.7bn was withdrawn from cash Isas in June, the largest amount since records began, according to the latest figures from industry body UK Finance. Meanwhile, £6.5bn was paid into standard savings accounts over the same period. However, abandoning cash Isas completely is a mistake that could leave you facing a tax bill in the future.

The personal savings allowance lets basic-rate taxpayers earn up to £1,000 in interest per year before paying tax on their savings income. This allowance then tapers off as you earn more. Higher-rate taxpayers only get a £500 allowance, and additional-rate taxpayers get no allowance at all. That means if you get a pay rise that takes you into a different tax bracket, you could find yourself suddenly liable to pay tax on your savings. By contrast, money held in a cash Isa can grow tax-free regardless of how much you earn.

At present, low interest rates mean you have to have a lot of money tucked away to risk earning more than £1,000 of interest a year. But in the future interest rates may well rise, and they won’t have to go far for you to find yourself suddenly facing a tax bill. For example, a savings account paying 1% interest could hold up to £100,000 before a basic-rate taxpayer would need to worry about tax and £50,000 for a higher-rate taxpayer. If the rate rose to 3%, a basic-rate taxpayer could only deposit £33,000 tax-free and a higher-rate taxpayer would be limited to £15,000. This is obviously not a concern in a cash Isa; though while there is no limit on how much you can save tax-free in this type of account, there is a limit on how much you can deposit each year – this stands at £20,000 for the current tax year. 

Finally, when you die, your personal savings allowance dies with you, and cash you pass on will be liable for income tax if the returns exceed your beneficiary’s own savings allowance. However, Isa savings can retain their tax-free status if they are passed to a spouse or civil partner. See the column on the right for details of some of the better cash Isas available at the moment.

The top picks for your cash

The best rate you can get on a cash Isa depends on how long you are willing to lock your money away. Here are some of the top options at present.

► It’s always wise to have some money in an instant access account so you can easily pay for unexpected emergencies. Paragon Bank pays 1.05% on its instant-access Isa. It accepts Isa transfers too, if you want to move money from an existing cash Isa.

► If you don’t need instant access to your money, then you can boost your interest rate by locking cash away for a fixed period. Virgin Money currently pays 1.3% on its 1.3% one-year fixed-rate Isa, while Bank of Cyprus UK pays 1.22% (with a minimum deposit of £500). If you can wait two years, Virgin pays 1.51% on its two-year Isa.

► Don’t assume that taking out a very long-term fix will always get you the highest rate. At present, the best possible rate you can get on a cash Isa is 2% – but Yorkshire Bank pays that over three years, while several other accounts pay the same rate on five-year accounts.

► You can deposit up to £20,000 into a cash Isa every year, but if you have built up more than that in Isas and want to move money to a better-paying account, you’ll need to find an account that accepts Isa transfers. At the moment, the highest interest rate for transfers is that 2% offered by Yorkshire Bank.

► You can deposit up to £4,128 a year into a Junior Isa (Jisa) for under 16s. When they turn 18, this will convert into a standard Isa. The best rate at present is 3.25% from Coventry Building Society, and you can transfer money to this from another Jisa.

In the news…

► Barclays has become the first UK bank to launch voice-activated banking, allowing customers to use Apple’s virtual assistant Siri to make payments on their mobile, says Sophie Christie in The Daily Telegraph. Customers will be able to pay existing payees or mobile contacts without having to even open the banking app or enter a password; however, they will have to confirm payment by using their iPhone’s touch ID fingerprint feature.

► Given that railway fares are set to rise by 3.6% in January, the biggest rise in five years, it makes sense to claim back as much as you can when there are delays and cancellations, says Nina Montagu-Smith in The Times. If you are a season-ticket holder, different operators have different delay compensation policies – you can find all of them via National Rail’s website. Non-season ticket holders are entitled to a full refund of one-off tickets if your train is cancelled, or if it’s delayed and you choose not to travel. If your train is delayed and you do decide to travel, you can still get compensation, though the amount will vary from operator to operator. Make sure you make a claim within 28 days of the trip.

► “Humanity now spend a collective 1,300 years each day trying to break into their own stupid online accounts,” says Matt Rudd in The Times. While this might be a slight exaggeration, it is true that it has become increasingly time-consuming to come up with new complex passwords featuring numbers and special characters. And the latest advice suggests a different approach – “special characters are out, strings of random words are in”. “Symbols do help increase complexity but they make passwords harder to remember. Also, people tend to stick symbols at the end or the beginning, which cracking systems anticipate,” says cybersecurity expert Paul Vlissidis. “A good long pass phrase will beat an eight-character password using a full character set every time.” So for instance, you should go for something like elephantwingwindowuppity over baNaNa77%~. However, it is still advisable to have different passwords for each site. Use a password manager, such as 1Password, to keep track of them.