ISA’s or in full, Individual Savings Accounts have been for many years an essential tool for saving tax-free both in cash and stocks and shares. Many banks and building societies offered better rates for ISA’s to attract the longer term saver and keep them as customers.
However, times change and since the banking crisis, we all know that interest rates fell to incredibly low levels or even in some cases zero interest on our savings.
There have been other changes too that now affect our decisions, not least that every basic rate taxpayer can receive up to £1,000 in interest tax-free each year. The majority of savers here in the UK can perhaps only dream of getting anything in excess of that amount in a year from their savings. ISA’s have varied over the years as to how much you can save each year, but it now stands at 2018/19 tax year at £20,000.
Higher rate taxpayers don’t have this allowance so the way they will choose their savings accounts will be different.
There are also special ISA’s that have a lower investment limit, such as Lifetime ISA’s which is currently £4,000 and Help to Buy ISA’s at £3,400. These ISA’s though do have something added which is a 25% top up from the Government to encourage you to save. The rules don’t allow you to contribute to other cash ISA’s in the same tax year if you take one of these out bit of course if this is going to help you but your first home that 25% bonus is worth considering.
Standard cash ISA’s
If you are not likely to pay any tax on your savings or saving for your first home, the best account for you is one that is going to pay the most interest whether that is an ISA or not. For higher rate taxpayers you will need to calculate the interest you would receive from comparable accounts and take the tax into account as to which would be the best for you.
Stocks and Shares ISA’s
For stocks and shares ISA’s it is not possible to compare returns for the future but you might wish to carefully look at how well the funds have been performing, comparing like with like. For example, if you are looking at low/medium risk UK fund don’t compare past returns against a higher risk Asia fund.
ISA’s today do have a place, however, it has to be said that it might be quite likely that by regularly opening new accounts and getting introductory offers, other savings accounts can be better whether you are a standard or higher rate taxpayer. It pays to shop around, do your research and basic maths.