Do I need a Cash ISA?
Cash ISAs, most of us have one but do we really need them. Cash ISAs are these useful accounts where you can put your savings, earn interest and not pay any tax on that. However, in 2016 the government launched a new scheme called the Personal Saving Allowance (PSA) which means you are allowed to earn interest on your savings no matter where they are and not pay tax up to a certain point.
If you are a Basic-rate income tax payer you are allowed to earn £1,000 interest tax free and if you are a Higher-rate tax payer, that is you earn over £45,000 up to £150,000, you can receive £500 interest tax free.
How much do you need to save before hitting your PSA?
Considering at the moment on a 1-year fixed saving account the best interest rate you will get is 2%. You would need to have £50,000 in this account to earn £1,000 interest. For higher-rate tax-payers, you would need to have £25,000 in this account to earn £500 interest. So you can see you need quite a lot of savings before you find a Cash ISA useful.
How does this help you?
Why is this a good thing, how does it help you? Well you are no longer forced into putting your savings into a Cash ISA to avoid paying tax on interest. Instead you can shop around and find the best saving account for your first portion of savings and the interest you can earn.
When will you still need a Cash ISA?
First, if you are an Additional tax-payer – that is you earn over £150,000 a year – you will need a Cash ISA because you don’t have a Personal Saving Allowance (PSA).
Secondly, if you are hitting your PSA limit then of course you will need an ISA but you also need to think of the future; if you are coming up to your limit then you should make use of your Cash ISA deposit this year so that you have more space next year to deposit more as your savings grow.
Lastly, consider interest rates. If interest rates go up you will be earning more interest on your savings which may take you over your PSA which means you would need a Cash ISA.
There have it, Cash ISAs in a nutshell. If you have any questions leave a comment below or come to our website and Ask MOXI.