The ISA allowance for this tax year is £20,000, the highest it’s ever been. However, a new cap has been introduced a Personal Savings Allowance or PSA. This PSA is £1,000 for a basic rate tax payer and £500 for a higher rate taxpayer, additional rate tax payers do not qualify for a PSA.
Your PSA includes interest generated from accounts with:
- bank and building society accounts
- accounts with providers like credit unions or National Savings and Investments (NS&I)
- interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts
- income from government or company bonds
- most types of purchased life annuity payments
Your PSA does not include interest generated from ISAs!
Those whose taxable income is less than £17,500 do not have to pay any tax on interest generated from savings.
Is saving in an ISA always best?
Simply, no. Although all the interest you earn through an ISA is tax free, most people will not generate enough interest on their balance to push themselves over their PSA anyway.
For example, currently the highest interest easy access savings account will offer you 1.32% AER in the first year, meaning you would need to save over £76,000 into the account if you are a Basic Rate Taxpayer or £37,850 if you are a Higher Rate Taxpayer to exceed your PSA.
Whereas the highest interest cash ISA is currently offering 1.16% AER, meaning you would need to pay in over £200,000 as a Basic Rate Taxpayer or £100,000 as a Higher Rate Taxpayer. As you can only pay £20,000 a tax year into an ISA tax free, in this instance it wouldn’t pay to save in an ISA.
When are ISAs the best option?
- When you want to lock away your cash, for example to save for your children’s future.
- If you are an additional rate tax payer
- If you already save the most you can in a higher interest savings account
- Cash ISAs are just savings accounts you NEVER pay tax on
- You can only open one ISA each tax year
- You can only pay in £20,000 a year tax free.
- The interest varies from ISA to ISA
Stocks & Shares ISAs
- You do not pay capital gains on investments bought through an ISA, so if you will make gains of above £11,300 then you will exceed the Capital Gains Allowance and a Stocks and Shares ISA may be a good option for you.
- They can be risky depending on the type that you choose.
- Can save up to your full ISA allowance in a stocks & shares ISA
- A junior ISA is a tax-free way to save for your child
- You can put up to £4,128 per year into a junior ISA (£4,260 in the 2018/19 tax year)
- Those aged 16 or 17 can have both a junior ISA AND an adult cash ISA or Help to Buy ISA
- It tends to be better to save for your children’s future by saving into a normal savings account as they often have higher interest rates, this is unless you want to lock the money away until your child turns 18, you would generate over £100 of interest in a normal savings account (in which case any extra would be taxed at the parents tax band) or if the interest rate from the ISA is higher.
Help to Buy ISAs
- You can save up to £1,200 in your first month, then up to £200 a month after that
- The state adds 25% tax-free to whatever is in the ISA when you use it to buy a home
- You need to have saved at least £1,600 to get the bonus and the most they will pay the bonus on is £12,000 so you can receive up to £3000 towards to the cost of your first home.
- It can be used for any property costing under £250,000 (£450,000 in London) and any mortgage
- The Help to Buy ISA bonus only helps with the mortgage deposit, NOT the exchange deposit
- You must be 18 or over but under 40 to open a Lifetime ISA.
- You can put in up to £4,000 each year, until you’re 50. The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.
- Unless you are buying your first home, aged 60 or over or terminally ill with less than 12 months to live there is a 25% penalty for removing your money from the ISA.
- When you turn 50 you can no longer pay into the ISA, although it does remain open and generates interest until you can withdraw the money or chose to face the penalties for early withdrawal.
Lifetime ISA for buying you first home:
- The property must cost £450,000 or less
- you buy the property at least 12 months after you open the Lifetime ISA
- you use a conveyancer or solicitor to act for you in the purchase – the ISA provider will pay the funds directly to them
- you’re buying with a mortgage
- If the person you’re buying with has a Lifetime ISA, they can use their savings and government bonus too. Although the value of the property must still be £450,000 or less.
Lifetime ISA for saving for later life:
- You’ll pay a 25% charge if you withdraw money or transfer the Lifetime ISA to another type of ISA before 60.
- If you die your Lifetime ISA ends on the date of your death. There’s no charge to withdraw the funds or assets from your account. However, you do not get the government bonus on the amount.
If you have any questions about ISAs and whether they are the right decision for you, please feel free to contact us.