At a glance

  • Interest rates on Cash ISAs are currently very low
  • Demand for Cash ISAs has fallen – as there is now little difference between rates on ordinary savings accounts and ISA rates
  • But Cash ISAs can still be valuable for higher-rate and additional-rate taxpayers
  • Crucially, ISAs can be passed on tax-efficiently to your spouse in the event of your death – which isn't the case with traditional savings accounts

At a glance

  • Interest rates on Cash ISAs are currently very low
  • Demand for Cash ISAs has fallen – as there is now little difference between rates on ordinary savings accounts and ISA rates
  • But Cash ISAs can still be valuable for higher-rate and additional-rate taxpayers
  • Crucially, ISAs can be passed on tax-efficiently to your spouse in the event of your death – which isn't the case with traditional savings accounts

At a glance

  • Interest rates on Cash ISAs are currently very low
  • Demand for Cash ISAs has fallen – as there is now little difference between rates on ordinary savings accounts and ISA rates
  • But Cash ISAs can still be valuable for higher-rate and additional-rate taxpayers
  • Crucially, ISAs can be passed on tax-efficiently to your spouse in the event of your death – which isn't the case with traditional savings accounts

Times were tough for savers even before the current coronavirus crisis. Interest rates had been pared back to around or below 1%, which was below the 1.5% inflation rate.

Then, in March 2020, the Bank of England reduced interest rates twice in quick succession to try to support the economy, leaving its base rate at just 0.10%.

Banks and savings providers have been passing on this rate cut, meaning that many savers have seen their interest rates at historically low levels.

This makes it hard for savers to find a decent rate of interest on their savings – whether they are held in Cash Individual Savings Accounts (Cash ISAs) or in ordinary savings accounts.

Should I buy an ISA when rates are so low?

Cash ISAs used to be a good place to put your savings – they paid better rates than ordinary savings accounts and interest rates were competitive. For example, in July 2007 interest rates reached a peak of 5.75%.

Interest rates are now lower than at any other time in the Bank of England's 325-year history. Interest rates on Cash ISAs are paying below the rate of inflation. Analysts have warned that the COVID-19 crisis will have a deep effect on the UK economy – perhaps for three years or more. So with years of uncertainty and instability on the horizon, is it worth tying up your money in an account that you can’t access?

Interest rates on ordinary savings accounts and Cash ISA accounts are both at historically low levels – typically 1.1% for easy-access Cash ISAs and 1.2% for an instant-access online savings account. This is barely keeping pace with inflation.

In the past, Cash ISAs tended to pay higher interest rates than traditional savings accounts. They were a popular place in which to save cash because most people automatically paid tax on their savings – unless their cash was held in a tax-efficient product such as an ISA.

With lower interest rates and changes to the rules around tax on savings, the differences are less obvious. In fact, some ordinary savings accounts are paying better interest rates than a Cash ISA.

The introduction of the personal savings allowance on 6 April 2016 also means that almost all basic-rate taxpayers pay no tax on their cash savings, even if they hold the money outside an ISA. This means Cash ISAs have become less attractive for many savers, although they still have tax-planning value for higher- and additional-rate taxpayers.

Is it worth having a Cash ISA any more?

With the introduction of the personal savings allowance, most savers don’t pay tax on their savings. Instead, interest is paid into their bank account gross.

Under the new rules, basic-rate taxpayers have a £1,000 personal savings allowance. This means they can receive up to £1,000 a year in savings without paying any tax. Given that interest rates are so low – barely above 1% – they would have to have more than £100,000 in savings before they breached this allowance limit.

For higher-rate taxpayers, the personal savings allowance is halved. They have an allowance of £500 a year, which means that they can receive up to £500 in interest from a savings account before they have to pay tax. They would only need to have around £50,000 on cash deposit before they started to breach their annual personal savings allowance. So for some higher-rate taxpayers, using a Cash ISA for savings could be a useful tool as part of their annual tax planning.

Tax-efficient products such as ISAs can also be useful for additional-rate taxpayers because they do not receive a personal savings allowance. If they have any cash savings and receive interest, they will have to pay tax unless the cash is held within a tax-efficient product such as an ISA.

Your ISA allowance – use it or lose it

The important thing to remember about your annual ISA allowance is that if you do not use it in one year, it expires. You cannot carry it forward like some pension contribution allowances.

Although savings rates are very low at the moment, if they were to rise, even to an average 2% interest rate, it would not take long before the interest paid would breach the £1,000 PSA allowance.

Therefore, keeping your money within an ISA means you are protected if savings rates increase.

In addition, the personal savings allowance has only recently been introduced, and there is always the chance that it may be changed in a future government Budget. However, ISAs have been around for much longer and are less likely to be affected by political announcements. Once you have made use of your ISA allowance for the year, it cannot be taken away.

The rules around the annual dividend allowance

The issue around the efficacy of ISAs is further complicated by the dividend allowance.

Every year, you are allowed to take £2,000 in dividends tax-free. This means that any payouts from companies, as long as in total they are below the £2,000 threshold during the tax year, will not be taxed.

For sums above this level, basic-rate taxpayers pay 7.5% on dividends, while higher-rate taxpayers will be subject to a 32.5% tax charge and additional-rate taxpayers are charged 38.1%. To work out your tax band, add your total dividend income to your other income.

Although any savings account that you hold in a Cash ISA will not be paying dividends, some investors hold both a Cash ISA and a Stocks & Shares ISA, and the dividend allowance may affect their tax planning strategy as a whole.

Using Cash ISAs as part of a tax-planning strategy

One key advantage of a Cash ISA over ordinary savings accounts is that it can be passed tax-efficiently to your spouse if you were to die. It would stay tax-efficient and your spouse would benefit from an additional ISA allowance equal to the value of the cash passed on.

This may be very useful for families who want to plan to mitigate Inheritance Tax (IHT) as part of their long-term tax planning.

Although you can only open one Cash ISA in a financial year, you can transfer your money to a Stocks & Shares ISA later. You can divide your ISA allowance between a Cash ISA, a Stocks & Shares ISA, an Innovative Finance ISA and a Lifetime ISA.

Where should I put my money for the long term?

When markets are uncertain, it is all too easy to blur the line between short-term needs and long-term planning. Yet maintaining or increasing the spending power of your money over the longer term requires you to take some risk.

In the current economic climate, you might also be thinking about how to save money fast, wondering how much you should have in savings and how much you should save, both in the short term and for longer-term financial security and retirement planning.

While Cash ISAs are paying slightly higher rates than ordinary savings accounts, the money in your account will not be keeping pace with inflation. Therefore, if you are looking to grow the underlying value of your money and protect it against inflation, and you have a five-year investment horizon, you could consider a Stocks & Shares ISA instead. By investing in equities, your funds will have the opportunity to grow over time.

On the other hand, if you are saving for the short-to-medium term (for example for a house deposit or an emergency fund) then Cash ISAs offer capital protection. If you are unsure about stock markets now but might want to invest in the future, you could transfer your Cash ISA into a Stocks & Shares ISA at a later date. By choosing to save in an ISA, whether for cash or equities investments, you are locking in tax-efficient benefits for the future, which you would otherwise lose at the end of the tax year.

 

The value of a Stocks & Shares ISA will be directly linked to the performance of the funds selected and may fall as well as rise.  You may get back less than the amount invested.  

A Stocks & Shares ISA does not provide the security of capital associated with a Cash ISA.

The favourable tax treatment given to ISAs may not be maintained in the future, as they are subject to changes in legislation.

Times were tough for savers even before the current coronavirus crisis. Interest rates had been pared back to around or below 1%, which was below the 1.5% inflation rate.

Then, in March 2020, the Bank of England reduced interest rates twice in quick succession to try to support the economy, leaving its base rate at just 0.10%.

Banks and savings providers have been passing on this rate cut, meaning that many savers have seen their interest rates at historically low levels.

This makes it hard for savers to find a decent rate of interest on their savings – whether they are held in Cash Individual Savings Accounts (Cash ISAs) or in ordinary savings accounts.

Should I buy an ISA when rates are so low?

Cash ISAs used to be a good place to put your savings – they paid better rates than ordinary savings accounts and interest rates were competitive. For example, in July 2007 interest rates reached a peak of 5.75%.

Interest rates are now lower than at any other time in the Bank of England's 325-year history. Interest rates on Cash ISAs are paying below the rate of inflation. Analysts have warned that the COVID-19 crisis will have a deep effect on the UK economy – perhaps for three years or more. So with years of uncertainty and instability on the horizon, is it worth tying up your money in an account that you can’t access?

Interest rates on ordinary savings accounts and Cash ISA accounts are both at historically low levels – typically 1.1% for easy-access Cash ISAs and 1.2% for an instant-access online savings account. This is barely keeping pace with inflation.

In the past, Cash ISAs tended to pay higher interest rates than traditional savings accounts. They were a popular place in which to save cash because most people automatically paid tax on their savings – unless their cash was held in a tax-efficient product such as an ISA.

With lower interest rates and changes to the rules around tax on savings, the differences are less obvious. In fact, some ordinary savings accounts are paying better interest rates than a Cash ISA.

The introduction of the personal savings allowance on 6 April 2016 also means that almost all basic-rate taxpayers pay no tax on their cash savings, even if they hold the money outside an ISA. This means Cash ISAs have become less attractive for many savers, although they still have tax-planning value for higher- and additional-rate taxpayers.

Is it worth having a Cash ISA any more?

With the introduction of the personal savings allowance, most savers don’t pay tax on their savings. Instead, interest is paid into their bank account gross.

Under the new rules, basic-rate taxpayers have a £1,000 personal savings allowance. This means they can receive up to £1,000 a year in savings without paying any tax. Given that interest rates are so low – barely above 1% – they would have to have more than £100,000 in savings before they breached this allowance limit.

For higher-rate taxpayers, the personal savings allowance is halved. They have an allowance of £500 a year, which means that they can receive up to £500 in interest from a savings account before they have to pay tax. They would only need to have around £50,000 on cash deposit before they started to breach their annual personal savings allowance. So for some higher-rate taxpayers, using a Cash ISA for savings could be a useful tool as part of their annual tax planning.

Tax-efficient products such as ISAs can also be useful for additional-rate taxpayers because they do not receive a personal savings allowance. If they have any cash savings and receive interest, they will have to pay tax unless the cash is held within a tax-efficient product such as an ISA.

Your ISA allowance – use it or lose it

The important thing to remember about your annual ISA allowance is that if you do not use it in one year, it expires. You cannot carry it forward like some pension contribution allowances.

Although savings rates are very low at the moment, if they were to rise, even to an average 2% interest rate, it would not take long before the interest paid would breach the £1,000 PSA allowance.

Therefore, keeping your money within an ISA means you are protected if savings rates increase.

In addition, the personal savings allowance has only recently been introduced, and there is always the chance that it may be changed in a future government Budget. However, ISAs have been around for much longer and are less likely to be affected by political announcements. Once you have made use of your ISA allowance for the year, it cannot be taken away.

The rules around the annual dividend allowance

The issue around the efficacy of ISAs is further complicated by the dividend allowance.

Every year, you are allowed to take £2,000 in dividends tax-free. This means that any payouts from companies, as long as in total they are below the £2,000 threshold during the tax year, will not be taxed.

For sums above this level, basic-rate taxpayers pay 7.5% on dividends, while higher-rate taxpayers will be subject to a 32.5% tax charge and additional-rate taxpayers are charged 38.1%. To work out your tax band, add your total dividend income to your other income.

Although any savings account that you hold in a Cash ISA will not be paying dividends, some investors hold both a Cash ISA and a Stocks & Shares ISA, and the dividend allowance may affect their tax planning strategy as a whole.

Using Cash ISAs as part of a tax-planning strategy

One key advantage of a Cash ISA over ordinary savings accounts is that it can be passed tax-efficiently to your spouse if you were to die. It would stay tax-efficient and your spouse would benefit from an additional ISA allowance equal to the value of the cash passed on.

This may be very useful for families who want to plan to mitigate Inheritance Tax (IHT) as part of their long-term tax planning.

Although you can only open one Cash ISA in a financial year, you can transfer your money to a Stocks & Shares ISA later. You can divide your ISA allowance between a Cash ISA, a Stocks & Shares ISA, an Innovative Finance ISA and a Lifetime ISA.

Where should I put my money for the long term?

When markets are uncertain, it is all too easy to blur the line between short-term needs and long-term planning. Yet maintaining or increasing the spending power of your money over the longer term requires you to take some risk.

In the current economic climate, you might also be thinking about how to save money fast, wondering how much you should have in savings and how much you should save, both in the short term and for longer-term financial security and retirement planning.

While Cash ISAs are paying slightly higher rates than ordinary savings accounts, the money in your account will not be keeping pace with inflation. Therefore, if you are looking to grow the underlying value of your money and protect it against inflation, and you have a five-year investment horizon, you could consider a Stocks & Shares ISA instead. By investing in equities, your funds will have the opportunity to grow over time.

On the other hand, if you are saving for the short-to-medium term (for example for a house deposit or an emergency fund) then Cash ISAs offer capital protection. If you are unsure about stock markets now but might want to invest in the future, you could transfer your Cash ISA into a Stocks & Shares ISA at a later date. By choosing to save in an ISA, whether for cash or equities investments, you are locking in tax-efficient benefits for the future, which you would otherwise lose at the end of the tax year.

 

The value of a Stocks & Shares ISA will be directly linked to the performance of the funds selected and may fall as well as rise.  You may get back less than the amount invested.  

A Stocks & Shares ISA does not provide the security of capital associated with a Cash ISA.

The favourable tax treatment given to ISAs may not be maintained in the future, as they are subject to changes in legislation.

Times were tough for savers even before the current coronavirus crisis. Interest rates had been pared back to around or below 1%, which was below the 1.5% inflation rate.

Then, in March 2020, the Bank of England reduced interest rates twice in quick succession to try to support the economy, leaving its base rate at just 0.10%.

Banks and savings providers have been passing on this rate cut, meaning that many savers have seen their interest rates at historically low levels.

This makes it hard for savers to find a decent rate of interest on their savings – whether they are held in Cash Individual Savings Accounts (Cash ISAs) or in ordinary savings accounts.

Should I buy an ISA when rates are so low?

Cash ISAs used to be a good place to put your savings – they paid better rates than ordinary savings accounts and interest rates were competitive. For example, in July 2007 interest rates reached a peak of 5.75%.

Interest rates are now lower than at any other time in the Bank of England's 325-year history. Interest rates on Cash ISAs are paying below the rate of inflation. Analysts have warned that the COVID-19 crisis will have a deep effect on the UK economy – perhaps for three years or more. So with years of uncertainty and instability on the horizon, is it worth tying up your money in an account that you can’t access?

Interest rates on ordinary savings accounts and Cash ISA accounts are both at historically low levels – typically 1.1% for easy-access Cash ISAs and 1.2% for an instant-access online savings account. This is barely keeping pace with inflation.

In the past, Cash ISAs tended to pay higher interest rates than traditional savings accounts. They were a popular place in which to save cash because most people automatically paid tax on their savings – unless their cash was held in a tax-efficient product such as an ISA.

With lower interest rates and changes to the rules around tax on savings, the differences are less obvious. In fact, some ordinary savings accounts are paying better interest rates than a Cash ISA.

The introduction of the personal savings allowance on 6 April 2016 also means that almost all basic-rate taxpayers pay no tax on their cash savings, even if they hold the money outside an ISA. This means Cash ISAs have become less attractive for many savers, although they still have tax-planning value for higher- and additional-rate taxpayers.

Is it worth having a Cash ISA any more?

With the introduction of the personal savings allowance, most savers don’t pay tax on their savings. Instead, interest is paid into their bank account gross.

Under the new rules, basic-rate taxpayers have a £1,000 personal savings allowance. This means they can receive up to £1,000 a year in savings without paying any tax. Given that interest rates are so low – barely above 1% – they would have to have more than £100,000 in savings before they breached this allowance limit.

For higher-rate taxpayers, the personal savings allowance is halved. They have an allowance of £500 a year, which means that they can receive up to £500 in interest from a savings account before they have to pay tax. They would only need to have around £50,000 on cash deposit before they started to breach their annual personal savings allowance. So for some higher-rate taxpayers, using a Cash ISA for savings could be a useful tool as part of their annual tax planning.

Tax-efficient products such as ISAs can also be useful for additional-rate taxpayers because they do not receive a personal savings allowance. If they have any cash savings and receive interest, they will have to pay tax unless the cash is held within a tax-efficient product such as an ISA.

Your ISA allowance – use it or lose it

The important thing to remember about your annual ISA allowance is that if you do not use it in one year, it expires. You cannot carry it forward like some pension contribution allowances.

Although savings rates are very low at the moment, if they were to rise, even to an average 2% interest rate, it would not take long before the interest paid would breach the £1,000 PSA allowance.

Therefore, keeping your money within an ISA means you are protected if savings rates increase.

In addition, the personal savings allowance has only recently been introduced, and there is always the chance that it may be changed in a future government Budget. However, ISAs have been around for much longer and are less likely to be affected by political announcements. Once you have made use of your ISA allowance for the year, it cannot be taken away.

The rules around the annual dividend allowance

The issue around the efficacy of ISAs is further complicated by the dividend allowance.

Every year, you are allowed to take £2,000 in dividends tax-free. This means that any payouts from companies, as long as in total they are below the £2,000 threshold during the tax year, will not be taxed.

For sums above this level, basic-rate taxpayers pay 7.5% on dividends, while higher-rate taxpayers will be subject to a 32.5% tax charge and additional-rate taxpayers are charged 38.1%. To work out your tax band, add your total dividend income to your other income.

Although any savings account that you hold in a Cash ISA will not be paying dividends, some investors hold both a Cash ISA and a Stocks & Shares ISA, and the dividend allowance may affect their tax planning strategy as a whole.

Using Cash ISAs as part of a tax-planning strategy

One key advantage of a Cash ISA over ordinary savings accounts is that it can be passed tax-efficiently to your spouse if you were to die. It would stay tax-efficient and your spouse would benefit from an additional ISA allowance equal to the value of the cash passed on.

This may be very useful for families who want to plan to mitigate Inheritance Tax (IHT) as part of their long-term tax planning.

Although you can only open one Cash ISA in a financial year, you can transfer your money to a Stocks & Shares ISA later. You can divide your ISA allowance between a Cash ISA, a Stocks & Shares ISA, an Innovative Finance ISA and a Lifetime ISA.

Where should I put my money for the long term?

When markets are uncertain, it is all too easy to blur the line between short-term needs and long-term planning. Yet maintaining or increasing the spending power of your money over the longer term requires you to take some risk.

In the current economic climate, you might also be thinking about how to save money fast, wondering how much you should have in savings and how much you should save, both in the short term and for longer-term financial security and retirement planning.

While Cash ISAs are paying slightly higher rates than ordinary savings accounts, the money in your account will not be keeping pace with inflation. Therefore, if you are looking to grow the underlying value of your money and protect it against inflation, and you have a five-year investment horizon, you could consider a Stocks & Shares ISA instead. By investing in equities, your funds will have the opportunity to grow over time.

On the other hand, if you are saving for the short-to-medium term (for example for a house deposit or an emergency fund) then Cash ISAs offer capital protection. If you are unsure about stock markets now but might want to invest in the future, you could transfer your Cash ISA into a Stocks & Shares ISA at a later date. By choosing to save in an ISA, whether for cash or equities investments, you are locking in tax-efficient benefits for the future, which you would otherwise lose at the end of the tax year.

 

The value of a Stocks & Shares ISA will be directly linked to the performance of the funds selected and may fall as well as rise.  You may get back less than the amount invested.  

A Stocks & Shares ISA does not provide the security of capital associated with a Cash ISA.

The favourable tax treatment given to ISAs may not be maintained in the future, as they are subject to changes in legislation.

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