The cash ISA has proved to be a relatively popular means of saving over a number of years. After all, it is a simple means of shielding the interest income received from cash savings from tax.
However, the appeal of a cash ISA from a tax perspective has deteriorated in recent years. Tax changes on savings accounts, as well as a low interest rate, have meant that shielding cash savings from income tax has become relatively straightforward for most investors. And with various other products such as a Lifetime ISA being released, individuals with cash ISAs may find that they are missing out on tax benefits elsewhere.
With the government making changes to income tax on interest received from savings accounts, having a bog-standard savings account instead of a cash-based ISA may now be a worthwhile idea for many people. The first £1,000 of interest received in a savings account is now tax-free. With interest rates being near historic lows and it being difficult to generate more than 1.5% in interest from cash savings at the present time, it means that the interest from an individual’s first £67,000 in cash savings is tax-free.
As such, an investor must have over £67,000 in a cash ISA in order for it to have a benefit versus a bog-standard savings account from a tax perspective. As such, its appeal on a relative basis seems to be negligible for all but large investors.
While the tax efficiency of a cash ISA has declined, other products such as a Lifetime ISA have been introduced. This is available to anyone under the age of 40, with the government contributing a bonus until an individual reaches 50 years of age. The bonus equates to 25% of amounts invested up to £4,000 per year. This means that individuals investing £4,000 per annum in a Lifetime ISA from ages 18 to 50 could benefit from £32,000 in government bonuses.
A Lifetime ISA also provides a degree of flexibility which is not offered by pensions. Amounts can be withdrawn without penalty in order to pay for a first home, while withdrawals can be made for any other reason upon payment of a 25% penalty.
Stocks and Shares ISA
The government has also increased the amount which can be invested in a stocks and shares ISA each year to £20,000. While many investors may not add in anything near that sum each year, it essentially means that they can benefit from the lack of capital gains tax and dividend tax offered by a stocks and shares ISA across their entire portfolio. In the long run, this could lead to significant tax savings.
While cash ISAs were relatively appealing many years ago, today they seem to be somewhat redundant. Savings account shield individuals from income tax on significant sums given low interest rates, while products such as a Lifetime ISA and a stocks and shares ISA could provide greater tax advantages over the long run.
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