Well, he has nowt to do with this, but possibly on the telly in the corner, I was on-air at the time urging savers as usual to use their new tax-free cash ISA allowance – because ‘money was nicer in an ISA’. Everything changed though in 2016, when the Personal Savings Allowance (PSA) launched.
All a cash ISA is, is a savings account you don’t pay tax on.
These days, the cash ISA’s main boon is that interest from it doesn’t count towards the PSA: it’s still tax-free on top of that. That means for the few with savings (or earnings) big enough to break that limit, it’s a winner, as they can protect more interest from tax.
You get a £20,000 ISA allowance each tax year, and, crucially, money you put into an ISA stays tax-free year after year.
Yet for MOST, there’s no benefit of saving in a cash ISA – so you simply should focus on getting the highest interest rate. Over the last few years, cash ISAs have tended to have WORSE rates than normal savings across all categories. At the time of writing…
– Top easy access: Cash ISA 1.05 percent v Normal Savings 1.5 percent
– Top 1-year fix: Cash ISA 1.4 percent v Normal Savings 1.96 percent
– Top 2-year fix: Cash ISA 1.75 percent v Normal Savings 2.21 percent
So most should DITCH cash ISAs for accounts that pay more.
When I polled this on Twitter recently (@MartinSLewis), I found 85 percent of the 9,000 who said they had cash ISAs don’t pay tax on savings.
So why keep them? I know for years many had it drilled into them (often by me) that cash ISAs were nicer – but now people need deprogramming and pushed to just focus on the highest interest rates which come from top normal savings. Be brave, ditch the cash ISA and earn more.
While cash ISAs aren’t much cop for most, other ISAs can be.
If you’re a first-time buyer aged 18-39, check out the Lifetime ISA. You can save up to £4,000 a year in it, and once it has been open a year, when used towards a qualifying first home (one costing up to £450,000) you get an unbeatable 25% boost on top.
That means there’s up to £1,000 a year of free cash. There are cons as well as pros though, so it’s worth reading my full guide at www.moneysavingexpert.com/LISAs.
And if you’re looking to invest, a stocks and shares ISA does have actual tax benefits for many, unlike cash ISAs.
Martin Lewis is the Founder and Chair of MoneySavingExpert.com. To join the 7.5 million people who get his free Money Tips weekly email, go to www.moneysavingexpert.com/latesttip.