Have Budget changes made cash Isas worthless?

Have Budget changes made cash Isas worthless?

Around 28 million savers are set to benefit from a radical overhaul to high-street accounts next April. From then every basic-rate taxpayer will be able to earn £1,000 interest a year without having to pay tax. Higher-rate taxpayers will be able to earn £500 interest.

From 6 April 2016 banks and building societies will stop automatically deducting interest from your savings. It will all be paid before tax.

Those who earn below £16,800 a year won't have to pay any tax on savings interest. Meanwhile, if you earn less than £42,700 - the point at which higher-rate tax starts - you will be allowed to have £1,000 in savings interest tax-free.

Those with earnings from £42,701 to £150,000 will have a £500 allowance. If you earn more than this and are in the 45% tax band, you will pay tax on all your savings interest. This makes cash Isas - where your interest is automatically tax-free - suddenly seem identical to an ordinary high-street account for most people.

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Don’t ignore your cash Isa

Another change to come in later this year will let savers withdraw cash from an Isa and put it back in again without it counting towards their annual allowance of £15,240 for this tax year.

The difference between the two types of accounts will become clear if and when interest rates do go up. When that happens, £1,000 of interest may not seem a lot. In an account paying 3% it would mean savings of £35,000 would put someone over the limit as a basic-rate payer.

Patrick Connolly, chartered financial planner at independent financial adviser Chase de Vere, says: 'I recommend still using your cash Isa allowance. You don't pay any extra in charges and the interest is likely to be tax-free for a very long time.'

He adds: 'There is more chance of changes to the new £1,000 personal savings allowance and tax rates than the government introducing tax on what you have saved so far in your cash Isa.' Moreover, banks and building societies generally pay higher rates on cash Isas than on taxable accounts.

HSBC current account holders can go for the bank's Loyalty Cash Isa at 1.5% plus an extra £10 a month interest to Advance customers, 1.6% to Premier account holders and 1.4% to its other current account holders. It's a much better deal than its taxable easy-access account, Flexible Saver, which pays a pittance of 0.1% before tax (worth 0.08% after tax).

Santander and Nationwide both pay 1.5% on cash Isas to their current account holders. And you can transfer your existing cash Isas into these accounts. Other top-paying cash Isas include Skipton Limited Edition Online Isa at 1.6%, along with National Savings & Investments Direct Isa at 1.5%.

Star buys

Skipton Building Society Limited Edition Online Isa: 1.6% on minimum £1, no bonus or withdrawal restrictions. You can transfer your existing cash Isas into this account.

Virgin Money Defined Access Saver: 1.41% before tax (1.13% after tax) on £1 or more. You are limited to making three withdrawals a year.


Sums of more than £85,000 that are in your bank account for a short time should soon be protected under the compensation scheme. New rules to come into force on 2 July will give you extra cover under the Financial Services Compensation Scheme (FSCS) for up to six months.

Under the current scheme, the maximum you can get if your bank or building society goes bust is £85,000 per person - or £170,000 on joint accounts. To plug the gap, the 'temporary high balance' will cover up to £1 million for six months.

It will give you breathing space while you think about what you want to do with the money from the sale of your house, or if you get an inheritance or divorce settlement. It will also cover payments coming in if you have set up an equity release scheme or received a payout from an insurance company.

The new limit comes in just three months after the sweeping pension changes which allow you to take the large sums as cash from your pension.

The Bank of England, which proposed the new temporary cover, says it should cover 99% of money from house sales in England and Wales.

If you claim under the new rules, you have to prove to the FSCS that you had the money in the bank temporarily. The scheme has three months to pay out a high temporary payment once compensation is granted. Under the normal £85,000 cover, the payments are typically made within seven days of the bank or building society failing.

This article was written for our sister website Money Observer

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Your Comments

What's new?  ISA companies have been screwing us for years, perhaps now they'll have to up the anti

Interest rates have already made saving something of a no brainer! In the last three years my premium bonds have actually paid a better percentage than my ISA!

"Banks & Building Societies generally pay higher rates on cash isas than taxable accounts"!
If Patrick Connolly can direct me to an Isa that pays more than the 3% on offer at Santander, or the similarly high rates at TSB, Yorkshire, Clydesdale etc then I and no doubt many others will be extremely grateful.
The simple truth of the matter is that financial institutions have been taking the general public to the cleaners when it comes to Isa interest Rates. Worse still they offer a teaser rate and then reduce the rate in-year.
And remember articles of the kind written above only encourage government to cancel Isas on the grounds they are no longer necessary - usually six months before they up the tax on savings!
Cynical - yes, but then somebody is going to have to pay for the latest raft of election promises.

I agree with George. The best instant access ISA I can find pays 1.55/1.60% per annum and the ones that require you to tie your money up pay barely any more. Why would I do this when I can earn 4% with Lloyds, 5% with TSB and Nationwide and 3% with any number of banks, all instant access?! It's a no brainer!
Another question I would like answered is whether once banks and building societies start paying interest gross from April 2016, will bond funds that currently deduct tax at 20% do the same? It is a pain having to reclaim it on the R40 and would be nice not to have to. I have not managed to get an answer to this question yet - does anybody know?

Isn't the £1000 savings allowance still dependant upon legislation that may or may not be passed before or after the election?

ajay3 is perfectly correct - the outgoing government did not implement this legislation and even if they continue in power, will probably change their minds anyway as after the election, this bribe will no longer be needed.