Last month ushered in a new tax year and with it the chance to put more money into cash Isas.
They used to be simple – a choice of an easy-access or fixed rate savings account where your cash Isa allowance earned tax-free interest.
Then politicians muddied the waters with a string of variations on this popular account. Now savers have to wrestle with more complex terms and conditions, and more rules from the taxman.
The basic cash Isa essentially puts a tax-free wrapper around your nest-egg. You can put in between £1 and £20,000 as long as you are a UK resident and aged at least 16.
Then there is the flexible Isa – basically a normal cash Isa with a twist. This lets you take money out and replace it in the same tax year without the move counting towards your annual cash Isa allowance. So you can put in the full £20,000, take out £5,000 and replace it in the same tax year without busting your allowance.
Next is the so-called portfolio Isa, where you can split your cash Isa allowance between a fixed rate and easy-access account. With most providers this breaks the cash Isa rule which says you can only open one each tax year. But with a handful of providers including Ford Money, Nationwide Building Society and Newcastle Building Society, your fixed rate and easy-access money sit side by side in the same Isa rather than being split over two.
The inheritance Isa is available to widows, widowers and civil partners who have lost their spouse or partner since 3 December 2014. It’s essentially an extra Isa allowance on top of the usual £20,000, equal to the value of your partner’s Isa at the date of death. Some providers accept this extra allowance into their basic cash Isas, others offer separate accounts.
Years of rock-bottom rates and the arrival of the personal savings allowance has taken the sparkle off cash Isas. The personal savings allowance, introduced two years ago, means you can earn £1,000 in a taxable savings account without facing a tax bill as a basic rate payer or £500 as a higher rate payer. For example, you can have over £50,000 in the top-paying one-year bonds at 1.8 per cent without busting the £1,000 figure.
But although rates remain poor, experts warn against ignoring cash Isas. Keeping money in standard accounts could leave you with a tax bill down the line.
Carol Knight, chief operations officer at trade body Tisa, which promotes tax-free savings and investments, says: ‘At some point interest rates will rise as the economy is cyclical. Cash Isas give more protection against future tax bills and take away the worries of changes in the personal savings allowance or when you might breach it.’
Patrick Connolly, a certified financial planner at independent financial adviser Chase de Vere, adds: ‘There is no guarantee the personal savings allowance will last. Even if it does, it could be cut in future years in the same way as the dividend allowance, which fell from £5,000 to £2,000 in April. ‘
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