Some frightening numbers landed on my desk last week. More than four million savers’ accounts risk having to pay taxes on their interest, an increase of almost a million in six months.
The reason? Higher interest rates and the fact that the humble tax-free Isa money has been snubbed for years.
But the Isa is making a comeback as the first port of call for savers. I urge everyone to consider one, even those with small nest eggs.
A wave of new cash for Isas has been announced as interest in them increases. Savings app Chip will offer one for the first time – an easy-to-access version paying 4.75 per cent.
Coventry Building Society last week offered its option, at an even higher rate of 5.05 per cent if you open it online and limit withdrawals to four per year.
New deals: Higher interest rates mean cash Isa is back with a bang as first port of call for savers
More will likely follow, and I’ll keep you posted on the best of them. Cash Isas are basically the same as ordinary accounts, but the interest is tax free.
A study by Shawbrook Bank reveals that many savers do not understand how Cash Isas, launched almost 25 years ago, work.
But that’s hardly surprising: once the darlings of the savings world, they fell into dire straits eight years ago when the Personal Savings Allowance came into play. Few people who have started saving since then have had to think about exceeding their limit.
The allowance allows basic rate taxpayers to earn up to £1,000 in interest tax-free, while higher rate taxpayers can earn up to £500.
With savings rates now much more generous, a basic rate taxpayer would only need £20,000 in an account paying 5 per cent to receive their benefit. In contrast, higher rate taxpayers would reach theirs with £10,000.
When the benefit was introduced, rates were so low that the amount of savings you would need to pay a tax bill on your interest was off the charts – close to a six-figure sum for taxpayers at the rate of base.
Savvy savers struggled to understand the value of cash Isas because they could earn more in a regular account and pay no tax.
Providers also abandoned these services as demand declined; they faced higher administrative costs to manage these accounts.
That’s fair enough. There was a 40 percent gap between the highest one-year fixed rate bond at 1.35 percent and the equivalent Isa at 0.96 percent two years ago – before rates usually only start to increase.
Now that savers are turning to cash Isas again, this difference has fallen to less than 4 per cent: the best cash Isa rate is 4.98 per cent at Shawbrook, and the fixed rate bond is one year of Investec offers 5.15 percent.
On easy-to-access accounts, the gap went from 16 percent to almost zero. The highest taxable account is 5.1 per cent from Close Brothers (although you need £10,000 to open it) compared to 5.08 per cent from Zopa’s Isa, starting from £1.
Some providers even pay a better or equal rate on Isas and ordinary accounts. Scottish Building Society pays 4.75 per cent on its one-year fixed rate bond and fixed rate cash Isa.
Rates are so generous now that it doesn’t take much to blow your personal savings allowance.
The benefit of putting money into an Isa is that you won’t have to pay tax on the interest in the future if you find yourself caught in the tax net.
You can invest up to £20,000 into a cash Isa each tax year – and you still have until April 5 to use this year’s allowance.
New Yorkshire BS account pays 6%
Best deal: Yorkshire’s new Christmas Regular Saver 2024 pays 6% on savings between £1 and £150 a month
Do you need a little help saving for Christmas?
Yorkshire Building Society’s Christmas Regular eSaver pays 6% on savings between £1 and £150 per month.
It lasts until October 31, so you’ll have the money in time to do your Christmas shopping.
Saving £150 a month will net you around £1,540 after ten months.
But first check what your current account provider offers – you might get a better rate. For example, Nationwide’s 12 month plan pays 8 per cent up to £200 per month.
Avoid leaving cash in your bank account
Savers have around £254 billion in current accounts and earn no interest.
I understand the need to keep extra cash in your account for everyday spending: you don’t have to monitor what’s coming in and what’s going out and worry about accidentally going overdrawn.
But the trick is to not leave more than that and transfer any excess to a savings account where it will earn a better rate.
Here’s how you could do it.
Take a look at the ups and downs of your checking account balance over the past few months.
What is the biggest drop you can see in a month? Make sure you keep this amount – plus a little extra – in your account and transfer the rest to your savings.
You may need to monitor your checking account more closely if you’re spending more than usual, but it’s not a bad discipline to have.
The average account rate of 3.15 per cent will earn you £31 on every £1,000, or £50 if you opt for a higher paying account.
Current account amounts are higher today than at the start of the Covid lockdown in March 2020, and rates were low. This confirms my fears that people are leaving more than necessary.
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