Are ISAs still relevant for savers?

Written by Lisa Stanley Mann on 5th April 2016

With the new Personal Savings Allowance (PSA) coming into force today, 6 April,

Tom Riley

Nationwide’s Head of Savings, Tom Riley, has been kind enough to share his thoughts on whether ISAs still have a place for savers. 

  • The PSA comes into force from 6 April and means that up to £1,000 of savings income1, such as the interest you receive on your savings account, will be tax-free for basic taxpayers, while those on the higher rate will be able to earn up to £500 of savings income tax-free
  • It’s not just the savings market that may impact your situation; a change in personal circumstances could also have an effect
  • The Government is allowing providers to offer flexibility on ISAs. So, with some providers, you’ll be able to replace money withdrawn from some ISA products during the same tax year, without impacting your annual ISA allowance.

Tom Riley says: ‘You may be aware that since the Government announced that it would be launching the PSA, there has been plenty of debate about whether it will sound the death-knell of ISAs.

‘I don’t think it should spell the end to the traditional cash ISA and you should still consider opening one, particularly if you have a larger amount of savings. It’s important, though, that you understand the new changes to ensure you choose the best savings account to maximise your savings.

‘The PSA comes into force from 6 April and means that up to £1,000 of savings income1, such as the interest you receive on your savings account, will be tax-free for basic taxpayers, while those on the higher rate will be able to earn up to £500 of savings income tax-free. It’s important to remember that the annual £1,000 PSA limit is based on how much interest you earn during the tax year, rather than how much money you have in your account.

‘In the current environment, it would take a significant pot of money before tax needs to be paid (as outlined below). The rules mean the majority of savers will have no tax to pay on any interest earned.

Basic rate taxpayers (20%)

Savings Annual interest (1.5%) Tax paid currently Tax paid after
April 2016
£25,000 £375 £75 £0
£50,000 £750 £150 £0
£75,000 £1,125 £225 £25
£100,000 £1,500 £300 £100
£150,000 £2,250 £450 £250

Higher rate taxpayers (40%)

Savings Annual interest (1.5%) Tax paid currently Tax paid after
April 2016
£25,000 £375 £150 £0
£50,000 £750 £300 £100
£75,000 £1,125 £450 £250
£100,000 £1,500 £600 £400
£150,000 £2,250 £900 £700

‘While, in the short term, it could be argued that the introduction of the PSA means that ISAs will lose their main selling point – a place where people can save completely tax-free – that is perhaps short-sighted. It’s important to think longer term because, while you may be comfortably within your personal savings allowance at present, that situation could change. If and when interest rates start to rise, the £1,000 allowance may get eaten up more quickly than it is at present.

‘It’s not just the savings market that may impact your situation; a change in personal circumstances could also have an effect. For example, a pay rise at work could change what tax bracket you’re in, which in turn would impact your annual personal savings allowance. This is because higher-rate taxpayers get a lower allowance, and those on the top-rate (45%) don’t get any allowance at all.

‘It’s not just the here and now where I think ISAs are an option because spouses can inherit their partner’s ISA allowance upon death, whereas the new personal savings allowance can’t be inherited.

‘Also, from 6 April, the Government is allowing providers to offer flexibility on ISAs. So, with some providers, you’ll be able to replace money withdrawn from some ISA products during the same tax year, without impacting your annual ISA allowance. Any withdrawals need to be replaced before the end of the tax year though and you can’t carry forward any unused ISA allowance from previous years – so it’s a case of use it or lose it!

‘So, while the introduction of the PSA is certainly one of the biggest changes seen in the savings market for many years and will mean the vast majority of savers across the country will be able to save tax-free, the reasons outlined above are just some of the points why I think ISAs remain an option. I would encourage people to take the time to consider which account best suits them.’

1 What counts as savings income?