Savers have been given a boost from the Budget with the introduction of a new personal savings allowance.
From April 2016 you will be able to save £1,000 tax free, or £500 for higher rate taxpayers, on any savings account.
It means that 95 per cent of savers – 17 million people – will no longer pay a penny of tax on their savings, the chancellor George Osborne announced today in the Budget.
This tax cut is on top of the annual Isa allowance, which allows savers to put aside up to £15,000 a year and pay no tax on it.
But if savings accounts are now tax free for most savers, does today’s announcement spell the end of the cash Isa? Is there any point in sheltering your cash savings in an Isa wrapper if you’re unlikely to have to pay tax on them anyway?
End of the Isa?: From April 2017 savers will have an extra £1,000 allowance
Savings rates are currently so pitiful that you earn £1,000 interest in one year, you would have to have a huge sum squirrelled away.
The best online easy access online account in This is Money’s best buy tables at the moment is Virgin Money’s Defined Access Esaver, which pays 1.35 per cent.
To get interest of £1,000 on this account, you would have to put in around £74,074.
However if you are earning a poorer rate of interest, you could easily have to save more than £100,000 to earn £1,000 of interest.
Arguably anyone with less than this amount would therefore have no need to take advantage of a cash Isa as well.
However there are still some advantages to a cash Isa over a savings account. Firstly, while the cash Isa limit is £15,000 every year, any cash that has been tucked away into one is tax free indefinitely.
While most savers may not have more than £74,000 in savings now, it would only take five years of using the full Isa allowance before they did. With a cash Isa, once savers go over this amount their cash would still be tax free.
Secondly some Isa rates on offer could still beat savings rates. There are currently six Isas in This is Money’s best buy tables that offer 1.5 per cent. Those willing to fix could earn more.
The highest Isa rate on offer at the moment is 2.75 per cent for a five-year fix from United Trust Bank. Depending on how long you are willing to put your money away for, savings accounts or Isas may come out on top. For those with small amounts of savings, it would now be worth considering Isa and savings rates in tandem to work out which will offer the best deal.
Isas also have another advantage, as Rachel Springall of MoneyFacts explains.
‘People will still be better off with Isas as they can be passed on to spouses after death,’ she said.
‘The main benefit of cash Isas was the tax free rate. This has been reduced, but in the long-term they have the benefit of no inheritance tax.’
You could of course build up your pot and transfer it to an Isa later, but as she points out, the trouble is you don’t know when you will die.
Finally Isas have the advantage that any cash held can be moved between cash and stocks and shares and remain tax efficient.
Over recent years, stocks and shares Isas have performed much better than cash Isas.
Maike Currie, associate investment director at Fidelity Personal Investing, said: On New Personal Savings Allowance: ‘Removing the income tax on interest earned on cash makes for a great headline, but it will do little for cash savers who have to contend with paltry rates.
‘Holding money in a stocks and shares ISA should still result in superior returns over the long term. Fidelity Personal Investing calculates that if a saver had invested £15,000 into the FTSE All Share index over the 10 year period from 28 February 2005 to 27 February 2015, they would now be left with £31,889.69.
‘If, however, they had invested £15,000 into the average UK savings account over the same period, they would be left with £16,321.36. That’s a difference of £15,568.33 – too big for any saver to ignore.’
However, some experts remain unconvinced about the long-term future of the cash Isa following today’s announcement.
Chris Williams, chief executive of Wealth Horizon said: ‘There is no escaping the fact that the new personal savings allowance coming into effect next April could also be a death knell for cash ISAs.
‘With this new allowance sheltering savers cash from £1,000 of income tax we struggle to see who will bother using cash ISAs until rates improve.’
Dean Lamble, Managing Director at SunLife added: ‘Our research shows the average family has £9,280 in savings, and these changes may encourage people to save more.
‘The changes to savings interest also means cash ISAs may be less attractive and more people may want to put their ISA allowance into a stocks & shares ISA instead.’
Analyst Louise Cooper added that the tax cut on savings will do little to help savers who have been hammered for years by low interest rates.
‘Allowing those with savings to take £1000 of interest tax free is an attempt to appeal to traditional Tory savers who have been hit hard by low interest rates,’ she said.
‘But to generate £1000 of interest you would have to have £100,000 to £200,000 in a bank to start with. In the past that would have generated about £3000-£10,000 of interest a year. So a few hundred pounds less tax does not even come close to making up for the loss of interest. But it does allow Osborne to say that 95% per cent of savers will now be completely tax free – 17million people.’
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