Have Budget changes made cash Isas worthless?

Published by Sylvia Morris on 20 April 2015.
Last updated on 20 April 2015

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.

Spotlight

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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