We spoke to Myron Jobson, Senior Personal Finance Analyst at interactive investor, to explain whether you should put your money in a cash ISA or an easy-access savings account?
Savings rates have made a huge comeback following consecutive interest rate hikes by the Bank of England.
But should you put your savings in a cash ISA, or a standard savings account? We spoke to Myron Jobson, Senior Personal Finance Analyst at interactive investor, to explain the pros and cons. An ISA is a type of savings account where the interest you earn is protected from tax.
However, you’re limited to how much you can save each tax year. Of course, you’ll also want to make sure that the account you choose gives you the best possible returns for your money. Here are some of the key questions you’ll want to ask.
Will you pay interest?
There is a personal savings allowance which lets you earn a certain amount of interest before you start to pay tax. The personal savings allowance for 20% basic rate taxpayers is £1,000, and for higher 40% rate taxpayers, the allowance is £500. Additional 45% rate taxpayers receive no tax break at all on savings.
Myron said: “Cash ISAs were out of fashion for many years when savings rates were in the doldrums. Low interest rates meant many people felt they needn’t bother to hold their savings with the tax efficient wrapper because the interest paid didn’t breach the personal savings allowance which enables basic-rate taxpayers to receive up to £1,000 and higher-rate taxpayers receive up to £500 of savings interest payments without any tax being due.
“However, the reprieve in savings rates, following 14 consecutive interest rate hikes, has increased the allure of the ISA wrapper – particularly among those who can no longer avoid paying tax on their savings. Crucially, over time, as their savings grow, they will continue to benefit from tax-interest if their cash is held within an ISA.”
How much do you have to save?
However, you can only deposit up to £20,000 each tax year into a cash ISA. This can be restrictive if you have a lot of money stashed away. Myron said: “The ISA allowance is spread across the different ISA account, meaning contributions to other types of ISAs is deducted from the overall ISA allowance, leaving less to put into a cash ISA.“
Other savings accounts may have their own overall deposit limits, but these will typically be far higher than £20,000. Check the terms and conditions of the account you want to open to be sure.
Which pays the best?
You will also want to check the savings rate you’re being offered, to judge whether a cash ISA or standard savings account is right for you. For example, you can get up to 5.17% easy access with a cash ISA, or up to 5.05% fixed, while the top-paying easy-access savings accounts offer up to 5.06%, or up to 5.25% fixed.
Regular saving accounts pay even more than this – but you’re normally limited to how much money you can save each month. For example, First Direct has a linked saver which pays 7% fixed for one year – but you can only deposit up to £300 each month.
