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You can find the current article at its original source at http://www.theguardian.com/money/2016/mar/12/should-i-still-get-cash-isa-personal-savings-allowance-interest-tax-free
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| Personal savings allowance changes: should I still get a cash Isa? | Personal savings allowance changes: should I still get a cash Isa? |
| (6 months later) | |
| Next month will see a revolution in how your bank and building society accounts are taxed. Until now, your account provider has automatically whipped 20% from the interest earned on savings accounts and passed the money to the taxman. But from 6 April this decades-old system will be swept away, and all the interest earned on your savings will be paid out in full, without any tax deducted. | Next month will see a revolution in how your bank and building society accounts are taxed. Until now, your account provider has automatically whipped 20% from the interest earned on savings accounts and passed the money to the taxman. But from 6 April this decades-old system will be swept away, and all the interest earned on your savings will be paid out in full, without any tax deducted. |
| What’s more, the government is introducing a personal savings allowance of up to £1,000 a year in interest, which means the vast majority of people won’t have to pay tax on their savings income. In the past, the cash Isa sheltered your savings from tax – but now people are asking if there is any point in having an Isa any more. | What’s more, the government is introducing a personal savings allowance of up to £1,000 a year in interest, which means the vast majority of people won’t have to pay tax on their savings income. In the past, the cash Isa sheltered your savings from tax – but now people are asking if there is any point in having an Isa any more. |
| The new tax system works like this: if you are a basic rate taxpayer – ie you earn less than £43,000 a year – then you will be allowed to earn up to £1,000 in interest without having to pay tax or declare it on a tax form. If you earn more than £1,000 in interest then your bank or building society will contact HMRC, which will tax the money by making a downward adjustment to your annual tax code. | The new tax system works like this: if you are a basic rate taxpayer – ie you earn less than £43,000 a year – then you will be allowed to earn up to £1,000 in interest without having to pay tax or declare it on a tax form. If you earn more than £1,000 in interest then your bank or building society will contact HMRC, which will tax the money by making a downward adjustment to your annual tax code. |
| But it’s difficult to earn more than £1,000 in interest with rates at rock-bottom lows. If, for example, you put your savings into the current best easy access account, the Freedom Savings Account from RCI Bank, the interest rate is only 1.55%, which means you would need to have £64,516 in savings to bust the £1,000 annual interest limit. The cash Isas from the big banks pay even less: Barclays, for example, pays just 0.8% on its variable rate Isa. A Barclays customer would need to have more than £125,000 in their savings account to produce an interest income of more than £1,000. | But it’s difficult to earn more than £1,000 in interest with rates at rock-bottom lows. If, for example, you put your savings into the current best easy access account, the Freedom Savings Account from RCI Bank, the interest rate is only 1.55%, which means you would need to have £64,516 in savings to bust the £1,000 annual interest limit. The cash Isas from the big banks pay even less: Barclays, for example, pays just 0.8% on its variable rate Isa. A Barclays customer would need to have more than £125,000 in their savings account to produce an interest income of more than £1,000. |
| If you earn more than £43,000 a year it’s a different story. Higher rate taxpayers are only allowed to earn £500 in interest over the year without having to pay tax. In the case of the RCI account, you will be taxed if you have more than £32,258 in savings. For people who are 45% taxpayers – earning more than £150,000 a year – there will be no personal savings allowance, and they will have to pay tax at 45% on any savings interest. | If you earn more than £43,000 a year it’s a different story. Higher rate taxpayers are only allowed to earn £500 in interest over the year without having to pay tax. In the case of the RCI account, you will be taxed if you have more than £32,258 in savings. For people who are 45% taxpayers – earning more than £150,000 a year – there will be no personal savings allowance, and they will have to pay tax at 45% on any savings interest. |
| Susan Hannums, director at Savingschampion.co.uk, says savers should simply go for the best rates possible rather than focusing on whether or not the account is a tax-free Isa. “Savers will have greater flexibility as they will be able to choose from the very best savings accounts available to them, which could be a cash Isa, a normal savings account, or even a high interest current account.” | Susan Hannums, director at Savingschampion.co.uk, says savers should simply go for the best rates possible rather than focusing on whether or not the account is a tax-free Isa. “Savers will have greater flexibility as they will be able to choose from the very best savings accounts available to them, which could be a cash Isa, a normal savings account, or even a high interest current account.” |
| Several current accounts pay much higher rates of interest than savings accounts. For example, TSB’s current account pays 5% on balances up to £2,000, provided you pay in £500 a month and register for internet banking. You also get 5% cashback on the first £100 spent each month on your contactless debit card until the end of this year, as well as access to a regular savings account paying up to 5%. | Several current accounts pay much higher rates of interest than savings accounts. For example, TSB’s current account pays 5% on balances up to £2,000, provided you pay in £500 a month and register for internet banking. You also get 5% cashback on the first £100 spent each month on your contactless debit card until the end of this year, as well as access to a regular savings account paying up to 5%. |
| If you have more to save, Santander’s 123 account pays 3% on balances up to £20,000. There’s a £5 monthly fee, but the account pays cashback on utility bills which should cancel this out. | If you have more to save, Santander’s 123 account pays 3% on balances up to £20,000. There’s a £5 monthly fee, but the account pays cashback on utility bills which should cancel this out. |
| Bear in mind, however, before turning your back on cash Isas for good, that when interest rates eventually start to rise, the amount you can save before you use up your savings allowance will fall. For example, if a basic rate taxpayer saves into an account paying 4.15%, they would only need to deposit £24,096 before they use up their personal allowance, or £12,948 if they are a higher rate taxpayer. | Bear in mind, however, before turning your back on cash Isas for good, that when interest rates eventually start to rise, the amount you can save before you use up your savings allowance will fall. For example, if a basic rate taxpayer saves into an account paying 4.15%, they would only need to deposit £24,096 before they use up their personal allowance, or £12,948 if they are a higher rate taxpayer. |
| Charlotte Nelson of moneyfacts.co.uk says: “Isas should not be overlooked, particularly if you are able to save up to the Isa limit each year, as the cash saved within the Isa will be tax-free indefinitely. While most savers may not save enough to earn £1,000 in interest now, it is quite possible they could in future.” | Charlotte Nelson of moneyfacts.co.uk says: “Isas should not be overlooked, particularly if you are able to save up to the Isa limit each year, as the cash saved within the Isa will be tax-free indefinitely. While most savers may not save enough to earn £1,000 in interest now, it is quite possible they could in future.” |
| Martin Lewis of MoneySavingExpert reckons savers should not abandon Isas. “For most people it will still be best to put your money in a top cash Isa first, and then use the personal allowance after that. Money in a cash Isa is protected from tax year after year, so you can gradually protect more and more. So even if this isn’t relevant now, if you later have larger savings or become a higher rate taxpayer then it is worth doing, just in case.” | Martin Lewis of MoneySavingExpert reckons savers should not abandon Isas. “For most people it will still be best to put your money in a top cash Isa first, and then use the personal allowance after that. Money in a cash Isa is protected from tax year after year, so you can gradually protect more and more. So even if this isn’t relevant now, if you later have larger savings or become a higher rate taxpayer then it is worth doing, just in case.” |
| The allowance explained | The allowance explained |
| What is the new allowance? All interest on bank accounts, writes Patrick Collinson, will be paid gross from April 2016: | What is the new allowance? All interest on bank accounts, writes Patrick Collinson, will be paid gross from April 2016: |
| • Basic rate (20%) taxpayers can earn £1,000 interest with no tax | • Basic rate (20%) taxpayers can earn £1,000 interest with no tax |
| • Higher rate (40%) taxpayers can earn £500 interest with no tax | • Higher rate (40%) taxpayers can earn £500 interest with no tax |
| • Top rate (45%) taxpayers will have no allowance. | • Top rate (45%) taxpayers will have no allowance. |
| What if I earn more than the allowance? Tax will be charged at the individual’s marginal rate – 20%, 40% or 45% – on any interest earned above the personal savings allowance (PSA). But HMRC says you won’t need to do anything: it will collect the tax by changing your tax code. For example, the standard tax code for 2016-17 will be 1100L (meaning you have £11,000 of earnings that are tax free). This will be adjusted by HMRC to a lower number, which means you will pay more tax. Banks and building societies will give HMRC the information they need to do this. If you fill in a self-assessment tax return you should carry on doing this as normal. | What if I earn more than the allowance? Tax will be charged at the individual’s marginal rate – 20%, 40% or 45% – on any interest earned above the personal savings allowance (PSA). But HMRC says you won’t need to do anything: it will collect the tax by changing your tax code. For example, the standard tax code for 2016-17 will be 1100L (meaning you have £11,000 of earnings that are tax free). This will be adjusted by HMRC to a lower number, which means you will pay more tax. Banks and building societies will give HMRC the information they need to do this. If you fill in a self-assessment tax return you should carry on doing this as normal. |
| We’re a couple, one on higher rate tax, with a joint account. What happens? The interest earned will be split equally between the account holders and will count towards their own allowances. | We’re a couple, one on higher rate tax, with a joint account. What happens? The interest earned will be split equally between the account holders and will count towards their own allowances. |
| What sort of accounts will come under the allowance? Bank and building society accounts; accounts with providers like credit unions or National Savings and Investments; interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts; income from government or company bonds; interest on peer-to-peer accounts; and most types of purchased life annuity payments. | What sort of accounts will come under the allowance? Bank and building society accounts; accounts with providers like credit unions or National Savings and Investments; interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts; income from government or company bonds; interest on peer-to-peer accounts; and most types of purchased life annuity payments. |
| What if I already pay into a cash Isa? It will make no difference to your personal savings allowance. You will still earn interest on your cash Isa tax-free, but it won’t count towards your PSA limit. | What if I already pay into a cash Isa? It will make no difference to your personal savings allowance. You will still earn interest on your cash Isa tax-free, but it won’t count towards your PSA limit. |
| Should I cash in my existing cash Isa? Although cash Isas will look much less attractive once the PSA is introduced, experts advise against cashing in existing accounts. | Should I cash in my existing cash Isa? Although cash Isas will look much less attractive once the PSA is introduced, experts advise against cashing in existing accounts. |
| Martin Bamford of independent financial adviser Informed Choice says: “I certainly wouldn’t advise any savers to cash in their Isas. The real value from Isas comes over time, when you maximise your allowance each year and accumulate significant sums in these tax-free wrappers. In my opinion, HM Treasury is far more likely to change or reverse the personal savings allowance than remove the tax benefits of Isas.” | Martin Bamford of independent financial adviser Informed Choice says: “I certainly wouldn’t advise any savers to cash in their Isas. The real value from Isas comes over time, when you maximise your allowance each year and accumulate significant sums in these tax-free wrappers. In my opinion, HM Treasury is far more likely to change or reverse the personal savings allowance than remove the tax benefits of Isas.” |
| Currently, savers could have more than £86,000 in capital in cash Isas alone if they had deposited the full amount each tax year since Isas first launched in 1999. Once you cash in any Isas you immediately lose the tax-free benefit. Charlotte Nelson of Moneyfacts.co.uk says: “Savers with old Isas would be better off transferring these to a higher interest Isa account to ensure that competitive returns are maintained.” | Currently, savers could have more than £86,000 in capital in cash Isas alone if they had deposited the full amount each tax year since Isas first launched in 1999. Once you cash in any Isas you immediately lose the tax-free benefit. Charlotte Nelson of Moneyfacts.co.uk says: “Savers with old Isas would be better off transferring these to a higher interest Isa account to ensure that competitive returns are maintained.” |
| Does the PSA affect my personal tax allowance? No. Your personal allowance is the amount you can earn which is free of income tax. This is £10,600 this year and £11,000 for 2016-17. This is completely separate from the PSA. | Does the PSA affect my personal tax allowance? No. Your personal allowance is the amount you can earn which is free of income tax. This is £10,600 this year and £11,000 for 2016-17. This is completely separate from the PSA. |
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