They were once the foundation of every shrewd savers’ financial plans – but rates on cash Isas fell to such low levels in the wake of the 2008 financial crash that they were no longer worth worrying about. .
Now, thanks to successive Bank of England base rate hikes, they are back in full force. And just in time for the start of a new fiscal year.
You can now earn up to 4.2% totally tax-free without risking losing your money (unlike the stock market).
Tax relief: Thanks to successive increases in base rates by the Bank of England, Cash Isas are back in force. And just in time for the start of a new fiscal year
Two years ago, putting Isa’s entire £20,000 allowance into Isa’s top treasury would have earned £350 in annual interest. Today, however, you can receive up to £840.
Additionally, as interest rates rise, the Isas’ tax-exempt status again puts them at the center of prudent tax planning.
Every year, through the Personal Savings Allowance, basic rate taxpayers can earn £1,000 of tax-free interest off an Isa. For higher rate taxpayers, the tax exemption limit is £500. (Wealthier taxpayers get nothing.)
Yet today’s higher savings rates mean it’s much easier to hit those limits, even with a modest savings pot.
Our Isa Special not only tells you where the best cash Isa rates are for your money and if you should lock in, but also how to raise the rate on old pots.
Then, in the rest of this special supplement, we take an in-depth look at the Isa investment funds that are set to soar; how to create a golden nest egg for children or grandchildren; and everything you need to know about tax-free savings.
Cash Isa was a huge hit when it first appeared in 1999. But in recent years millions of savers have abandoned them due to a combination of floor rates and a tax advantage over regular savings accounts. .
The demise of the cash Isa has been particularly acute since the Bank of England base rate hit an all-time low of 0.1% in March 2020. In the two years to August last year , savers withdrew £9.25 billion from the Isas in cash.
But the tide started to turn last September, when a net £37million (including withdrawals) was paid to them.
By January this year (the latest figures available from the Bank of England), that figure had jumped to £1.15billion, bringing the total to £3.9billion in cash over five months.
When UK interest rates were at historic lows, few basic rate taxpayers needed to worry about paying tax on savings held outside an Isa, as the government introduced an allowance personal savings of £1,000 for them in 2016.
But with rising interest rates, that approach has now changed.
Anna Bowes, co-founder of Savings Champion, says: “With rising rates, there is a danger that savers will have to pay tax on their interest if they leave it in non-Isa accounts.” Isa’s money is coming back strong.
Traditionally, cash Isas have often paid less than regular savings accounts – but the gap is now narrowing, making cash Isas a more attractive option
Traditionally, cash Isas have often paid less than regular savings accounts – but the gap is now narrowing, making cash Isas a more attractive option.
Zopa’s most taxable easy-access account pays 3.21% (2.56% after basic tax). The best Isa open to all Cynergy Bank savers is slightly less than 3.05%, but there is no tax to pay.
A year ago you could have up to £111,100 in an easy-to-access account – even at the then best rate of 0.9% – without breaking your £1,000 personal savings allowance as a taxpayer at the base rate.
With the top interest rate now around 3.2%, this maximum cap is reduced to £31,250 if you want to avoid paying tax on your savings.
Higher rate payers are taxed if their balances are over £15,625.
On fixed rate bonds, OakNorth Bank’s best rate more than doubled from 1.75% to 4.32%.
At 1.75% you had no tax worries, as a base rate payer, unless you had more than £57,120 in security. Now that amounts to £23,140 for base rate payers and £11,570 for higher rate payers.
Justin Modray of Candid Financial Advice said: ‘As the Chancellor seems to like stealth tax increases, there is a risk that the Personal Savings Allowance will be reduced in the future.
This allowance has been frozen since it was introduced in April 2016. If it had increased with inflation, it would now be around £1,380.
With income tax brackets also frozen, savers also risk being pushed into a higher tax bracket – and losing even more of their tax allowance.
The annual personal allowance – the amount of income you can qualify for before paying tax – is frozen at £12,570 until April 2028.
Under tax rules you now pay 40% tax when your income reaches £50,270 and from next month the additional rate of 45% once your income reaches £125,140, up from £150,000 currently .
These rates apply to the interest you earn on savings outside of an Isa. The Office for Budget Responsibility estimates that over the next five years the freeze will drag 3.2 million people into the basic rate tax net and 2.6 million more into a higher rate as income will increase.
Cash Isa rates go up as providers jump on each other to pay better rates.
While the best easy-access Isas now pay around 3%, you can earn about 1 percentage point more if you’re willing to tie up your money for a year in a fixed-rate Isa.
Experts warn that rates for the latter have likely peaked at around 4%. Sarah Coles of Hargreaves Lansdown says: “You might be tempted to wait and see if better rates emerge. But any upward movement is likely to be weak.
Even the big banks, notably absent from Isa’s best buys for years, are joining us. Halifax launched a one-year contract at 3.6% earlier this month, down from 2.8%. Barclays paid 4% for a year but pulled the popular account from the sale yesterday.
An industry insider told Money Mail that the big banks are realizing that savers are moving their money around now that rates are rising. But some still pay low rates on their easy-to-access Isas.
Lloyds and Barclays pay as little as 0.65%, Santander 0.6% and Halifax 0.7%. NatWest pays 0.65%, rising to 2% on £25,000 or more.
Its rates will rise on March 23, to 1% on balances up to £25,000 and 2.25% on higher amounts – so still well below the top rates.
How to change your Isa
Don’t move your Isa money yourself – or you could lose the tax benefits on your money. Instead, choose a new supplier and complete their Isa transfer form.
Here you give the details of your existing Isa along with your name, address and the amount you wish to transfer.
The new supplier sends your transfer form to your current supplier and they arrange the transfer between them.
HMRC rules state that if you transfer money you have placed in a cash Isa during the current tax year, you must transfer it in full together with interest.
For the money you deposited in previous years, you can transfer all or part of it.
Transfers shouldn’t take longer than 15 business days.
See the best Isa cash rates in our savings tables
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