Cash ISAs are hot again

Author: Anna Bowes | Co-Founder –  Savings Champion

21st February 2024

As we approach the ISA season, it’s a relief to see that things have improved for savers, so there should be plenty to choose from, including those looking to shelter some of their savings from the taxman.

What is an ISA?
ISA stands for Individual Savings Account and quite simply it is a tax-free savings account – offering tax-free interest for cash savers and tax-free growth and income for investors. There are four main types of ISA; Cash, Stocks and Shares, Lifetime ISA and Innovative Finance ISA and you can put money into one or each different type each tax year (although the rules are changing) – as long as you keep within the ISA allowance, which is currently £20,000.

Why are cash ISAs popular again?
With interest rates rising significantly over the last couple of years, more and more savers are breaching their Personal Savings Allowance (PSA), with far smaller deposits of savings. And since the PSA has not increased at all since its inception in April 2016, it means savers may be subject to paying more tax.

The PSA means that basic rate taxpayers can earn £1,000 a year in savings interest before they may have to pay tax on their savings – for higher rate taxpayers the allowance is half, £500 a year.

Back in December 2021, before the base rate started to rise, someone with £20,000 in the top easy access account would have earned £150 in interest – well within both the basic and higher rate taxpayer PSA. Today, with the top taxable easy access accounts paying more than 5%, that £20,000 could earn £2,500 or more – so a basic rate tax payer would need to pay 20% on £1,500, meaning they would take home £2,200 and pay the taxman £300.  For higher rate taxpayers, it’s even more expensive to ignore your ISA allowance, as the table below illustrates.

Interest Earned in an ISA v Standard Savings Account

Interest earned* per year – assuming PSA was unused
Deposit Interest earned* when funds in an ISA Interest earned* when not in an ISA after 20% tax deducted Interest earned* when not in an ISA after 40% tax deducted
£20,000 £1,000 £1,000 £800
£50,000 £2,500 £2,200 £1,700
£100,000 £5,000 £4,200 £3,200

*Interest earned assumes a rate of 5% before the deduction of tax

So, a 40% taxpayer who has squirreled away £100,000 into a cash ISA over the last few years could be saving £1,800 a year in tax! A significant saving.

In addition to the PSA remaining stuck, so too has the annual ISA allowance. It has been at £20,000 since April 2017 and in the November 2023 Autumn Statement, it was announced that it will remain the same again in the new tax year.

With interest rates rising so much over the last couple of years, this is a real blow considering that the Personal Savings Allowance has been ignored too – so cash ISAs are so much more important again for those trying to shelter some of their cash from the tax-man.

ISA changes are coming
On the plus side, there were some simplifications to ISAs that were announced in the Autumn Statement last November. Complex rules mean that people worry that they’ll make a mistake, so they may decide to avoid altogether – so hopefully this simplification will help make it easier in the future;

  • Allowing multiple ISA subscriptions: People will be allowed to open and pay into multiple ISAs of the same type in a single tax year. Currently people can only pay into one of each type of ISA every tax year.
  • Partial transfers allowed: Partial transfers of ISA funds in-year will be allowed, rather than being forced to transfer the whole amount of your current tax year ISA. Why was it previously a rule that while you could make partial transfers of old ISAs, you’d have to transfer the current tax year’s ISA entirely?
  • Harmonise ISAs to those over 18 years of age: The minimum opening age for adult ISAs will be 18. This isn’t good news for younger savers, as at the moment a 16-year-old can open an adult cash ISA.

With the exception of the last point, anything that can make ISAs simpler is welcome – and it will be particularly helpful for those opening a fixed rate ISA, as in many cases if you hadn’t fully funded immediately, you may well have been unable to maximise your allowance later on in the same tax-year, otherwise you would have fallen foul of the rules of opening more than one cash ISA in one tax year (unless it was a portfolio ISA!).

There is no deadline however for when these changes are to be implemented so provider’s offerings will be varied.

Use it or lose it
Unlike contributing into a pension, the ISA allowance is a use it or lose it one. So, if you miss the ISA deadline of the 5th April, you cannot go back and utilise it at a later date. It therefore makes sense to open a new ISA as soon as possible each tax year to make sure you don’t forget. This will also see you earning tax free interest for the whole tax year, rather than just at the very end.

Of course, it’s not just about using your current allowance either. With rates at a far more competitive level today, it makes sense to review old ISAs too and transfer them if you could be earning more tax-free interest elsewhere. But remember the golden and very important rule of moving your ISA. If you want to switch, you must not close your existing ISA as that will likely mean losing the tax-free benefit. Instead, you need to approach the new provider you wish to move to and complete the cash ISA application and transfer forms. They will then contact your existing provider and arrange the transfer for you.

Discover more about United Trust Bank’s range of cash ISAs here.

Although this email and article may contain helpful information and tips, these are not personal advice. You may wish to seek advice from a financial advisor if you are unsure what’s best for your own personal circumstances.