Why you should still put money into a cash Isa
Interest rates may be lousy, but tax-free saving into a cash Isa is still a good idea.
The last few months of the tax year are known as Isa (individual savings account) season thanks to the sheer volume of people who wait until the last minute to use up their tax-free allowance. Anyone over the age of 16 can deposit up to £20,000 into a cash, stocks-and-shares or investment Isa every tax year. Once the money is in an Isa it can grow free from any risk of having income tax or capital gains tax deducted. But, unlike other tax allowances, unused Isa allowances can’t be rolled over into the following tax year. Use it by midnight on 5 April or lose it.
In the last hour before midnight on 5 April 2020 a stocks-and-shares Isa was opened or added to every seven seconds at investment platform Hargreaves Lansdown as investors rushed to use their allowance before they lost it. This year, however, abysmally low interest rates have cast a pall over Isa season and may scotch the last-minute rush.
The vast majority of us put our money into cash Isas. There were 8.4 million cash Isas opened in the 2018-2019 tax year, but only 2.4 million investment Isas. The problem is that this year the interest rates are awful. The average rate on an easy-access Isa is just 0.24%, according to price-comparson site Moneyfacts, rising to 0.61% on the average long-term fixed-rate Isa. “Savers’ expectations of an Isa season will continue to wane in 2021 as rates plunge and some providers pull their deals entirely,” says Rachel Springall, finance expert at Moneyfacts. “There does not appear to be any promising sign of competition as rates reached new lows this month.”
Since the personal savings allowance was introduced in 2016, demand for cash Isas has waned. Basic rate taxpayers can earn up to £1,000 interest per tax year before it is liable for income tax. For higher-rate taxpayers it is £500; additional-rate taxpayers don’t get a personal savings allowance.
So, should you ignore Isa season this year? No. Set your sights on the long term and tuck that money away from the taxman.“If you’re a basic-rate taxpayer with a couple of thousand pounds in savings, you’re not going to save tax with a cash Isa this year; but it’s not this year you need to worry about – you’re protecting this cash from tax forever and, over time, all sorts of things could change,” says Sarah Coles from Hargreaves Lansdown in The Guardian.
“There will come a time when savings rates rise, and if they push you over the tax threshold, you’ll be glad your cash was protected. Likewise, your salary could increase and push you into a higher tax bracket, so your savings allowance halves or vanishes overnight.”
The best cash Isa rate available at present is 1.3%. That is a five-year bond with Gatehouse Bank. It may be the top rate but if savings rates rise in the next five years you could be left behind. Instead, you could get 0.8% with a two-year bond from Gatehouse or 0.6% on an instant-access Isa from Al Rayan Bank. Alternatively, if you won’t need to access your money for the long term consider a stocks and shares Isa. Historically, the stockmarket has outperformed cash savings. Over the past five years the FTSE 100 has risen by 14% despite last year’s market turmoil.