Will the Chancellor’s new tax breaks leave Cash ISAs out in the cold?
For Britain’s savers, times are bleak. New figures show continued reductions in savings rates right across the market. Moneyfacts figures indicate that, in January, there were almost seven times as many rate cuts as there were rises – in February there were 15 times as many.¹ Bank of England figures back up this trend; the average Cash ISA rate was 0.85% in December, but has fallen to 0.81% this year.²
Returns on Cash ISAs are now so low that many savers could be better off keeping their money in a current or standard savings account, especially as these will offer new tax breaks from April. Yet the majority of savers continue to deposit their valuable ISA allowance in low-paying accounts that fail to make the most of the tax breaks on offer.
The Personal Savings Allowance will mean that every basic rate taxpayer who saves into a regular savings account, current account or fixed-rate bond will pay no tax on the first £1,000 of interest. For higher rate taxpayers, the first £500 of interest will be tax-free. At the current average rate, a basic rate taxpayer will be able to hold more than £212,000 in a standard instant access savings account, and receive all the interest tax-free. For higher rate taxpayers, the figure is just over £106,000.
When the Chancellor announced the new arrangement in the 2015 Budget, he said that he aimed to create a “savings culture” in Britain. While the rhetoric would have appealed to Mr Osborne’s supporters, it risked a frosty reception from savers, who might be sceptical having endured years of meagre returns.
Those who have already ploughed their money into Cash ISAs did so in the belief that these vehicles were the only realistic tax-advantaged destination for their savings. Now those same individuals will be asking whether, in the short term, there is any point in continuing to save in this way.
At a time when rates remain among the lowest yet seen, the new savings allowance looks set to counter many of the arguments for saving into a Cash ISA. That said, if and when rates do eventually start to rise, the amount that can be saved tax-free through the Personal Savings Allowance will reduce, whereas in a Cash ISA the interest will remain free of tax regardless of the amount deposited.
However, interest rates are set to remain low for an extended period, and some commentators even forecast that rates could fall further. That means the majority of savers are likely to have a long wait before they have to give an account to the taxman for the interest paid on their regular savings and current accounts.
For those with a longer-term outlook, the case for sheltering money in a Stocks & Shares ISA before the end of the tax year is much clearer, presenting the opportunity to invest for the future with no more tax to pay on income or capital gains.
¹ Moneyfacts, February 2016
² Bank of England, March 2016
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 was invested. An investment in a Stocks & 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.