SAVERS who want to put money into an Isa before the end of the tax year in April can take advantage of a range of new deals and rates. More than 25 banks and building societies have increased their cash Isa rates or introduced new accounts to entice savers in the run up to the end of the tax year, according to Moneyfacts, the financial data firm.
Business bank OakNorth, for example, is offering an easy-access Isa that pays 1.45 per cent, putting it at the top of the best-buy table for easy-access accounts, alongside Virgin Money’s easy-access deal that also pays 1.45%.
There has been a raft of increases in the fixed-rate market, particularly one-year fixes. Shawbrook Bank is now top of the league with a one-year fix that pays interest of 1.74% on a minimum deposit of £1,000. Or there is Cynergy Bank’s one-year deal at 1.73% on a £500 minimum deposit.
Rachel Springall, finance expert at Moneyfacts, said: “Clearly, providers are sowing the seeds for savers to discover market-leading returns, and as the Isa season flourishes, it will hopefully lead to increased competition and even better deals as we move closer to the new tax year.”
Savers can put up to £20,000 into an Isa in the 2018/19 tax year. Cash Isas work like ordinary savings accounts, but there is no tax to pay on the interest earned in the account. It sounds good, but the appeal of cash Isas has diminished since the introduction in 2016 of the personal savings allowance, which allows basic-rate taxpayers to earn interest of up to £1,000 a year, tax free.
The allowance is £500 for higher-rate taxpayers. The English tax bands are used for the personal savings allowance, so you would be classed as a higher-rate taxpayer if your income was more than £46,350.
Sarah Coles of Hargreaves Lansdown, a financial adviser, said: “The personal savings allowance understandably led to questions as to whether it’s worth bothering with a cash Isa any more. With many cash Isa rates so low at the moment, earning more than the allowance doesn’t seem terribly likely.”
For example, a basic-rate taxpayer would have to deposit £66,500 in an account paying 1.5% to earn more than £1,000 in savings interest. A higher-rate taxpayer would need £33,500 to breach the £500 threshold.
Doubt is also cast on the benefit of Isas because many non-Isa accounts pay higher rates. For example, the easy-access account from The Family Building Society pays 1.51% , although the minimum deposit required is £15,000.
Savers with smaller amounts to deposit can earn 1.5% with Goldman Sachs, Cynergy Bank or Virgin Money. Fixed rates on non Isas are around 2% for a one-year deal, rising to 2.6% if you are happy to lock your money away for five years.
But Ms Coles cautioned against dismissing Isas completely. She said: “A basic-rate taxpayer with modest cash holdings won’t save any tax today by using an Isa: the key is what you could save further down the line.
“The tax savings on Isas accumulate as your savings build. These savings will be magnified if interest rates rise, you move tax brackets, or the savings allowance is cut. By using a savings account, you might be reasonably sure you won’t pay tax on your savings this year. By using an Isa, you can be sure to protect your savings from tax forever.”
Cash Isas are the most popular, but you could invest some or all of the £20,000 allowance in a stocks and shares Isa. Rebecca O’Keeffe, head of investments at Interactive Investor, said: “Cash might be king for many Isa investors, but the current rate of interest paid on cash means that savers are losing money in real terms. While it is easy to look back over the past 20 years and see a stock market that has been highly erratic, over time the equity market remains the best place to invest.”
If you invest in a stocks and shares Isa, you do not pay tax on dividends or profits.
Investors might be wary of stock markets after the falls in share prices at the end of last year, but Jason Hollands, managing director of Bestinvest, believes now could be a good time to invest.
“At a very basic level, a winning formula for investing is to buy low, sell high and after the turbulence at the end of 2018, share valuations have been driven down aggressively to levels that are, frankly, a lot more appealing than they were this time last year and look sensible compared to longer-term trends,” he said.
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