Cash is still the preferred home for ISA savers but for how much longer?
As we count down to next April and the introduction of the tax-free Personal Savings Allowance announced in this year’s Budget, figures released by HMRC reveal that cash is still king for Britain’s ISA savers. But is that going to change?
The total amount saved into ISAs rose to £79 billion in the last tax year – an increase of £20 billion on the previous year. Tellingly, the amount deposited into Cash ISAs jumped 60% in response to last summer’s changes, which saw the annual allowance increase to £15,000 and the removal of restrictions to allow the full ISA allowance in a Cash ISA.¹
Just under 80% of ISA accounts subscribed to in the last tax year were Cash ISAs, and over £237 billion is now deposited in these tax-advantaged saving accounts. Latest figures from Moneyfacts show that the average Cash ISA rate is currently 1.51%, significantly better than the average instant access account rate of 0.675%²; but will that represent the best use of an individual’s valuable ISA allowance once the Personal Savings Allowance is introduced?
The new Personal Savings Allowance applies to regular bank and savings accounts and will enable basic-rate taxpayers to earn £1,000 interest free of tax, saving a maximum of £200 compared with now. Higher-rate taxpayers will be able to earn interest of £500 before tax is paid, which will also save a maximum of £200. Anyone with taxable income over £150,000 a year will not get an allowance.
Of course, the likelihood is that interest rates will start to rise slowly next year – Bank of England governor Mark Carney recently suggested that base rates might get back to 2% over the next three years – but once the Personal Savings Allowance is introduced, at the current average rate, a basic rate taxpayer would be able to deposit over £148,000 in a standard instant access savings account and receive all their interest tax-free. For higher-rate taxpayers the figure is just over £78,000.
HM Treasury claims that the change will abolish tax on savings for 95% of people.³
Clearly, cash is the right home for money that might be needed in the short term, but the introduction of the Personal Savings Allowance may well lead savers to review whether it makes sense to continue to use their ISA allowance for their liquid funds.
Despite the popularity of ISAs, only 8% of individuals actually maximised their allowance last tax year. The average subscription was £6,064 – 40% higher than the previous year and a reflection of the increased allowance, but well below the £15,000 limit that applied in that tax year.1
Whilst ISAs have been an undeniable success in helping build the savings culture, next April will reveal how many more people fail to make the most of their ISA opportunity.
Those looking to maximise the tax benefits on offer, and to build capital and create income for the future, might consider that investing their ISA allowance in stocks and shares instead presents a better option for achieving their longer-term financial goals.
¹ HMRC, September 2015
² Moneyfacts, September 2015
³ HM Treasury, April 2015
The value of an ISA with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested. An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.
The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.