Throw your bowler hats in the area and shout “happy new (tax) year!” Okay, perhaps that’s overdoing it, but the one bit of good news is this wipes the cash ISA slate clean.
Every UK adult can now put £5,640 in one of these savings accounts, even if you opened one last month, just before the end of the old tax year. Better still, a price war means rates are near their highest for years. Here's the 10 top cash ISA need-to-knows.
1. A cash ISA's just a tax-free savings account
It sounds more complex than it is. It's just a risk-free savings allowance every UK taxpayer aged 16+ has, where your interest isn't taxed. Basic rate taxpayers normally hand over 20% of their savings interest to the taxman, but in an ISA you keep that, meaning you earn a quarter more interest.
2. You can now save even more this year
This year's new cash ISA limit is £5,640, up from £5,340. If you want to invest in shares too, the overall ISA allowance is £11,280, up from £10,680.
3. The top easy access deal pays 3.5% AER
If you might need quick access to your cash, the Cheshire Building Society pays 3.5% AER (min £1,000). If you’ve less, the Principality Building Society is 3.1 % (min £1). Nationwide FlexAccount holders can take advantage of its branch-based Flexclusive ISA at 4.25% AER. These rates can change daily, so for a daily updated list and more info, see moneysavingexpert.com/cashISAs Do note all of these include introductory bonus rate hikes lasting a year. In other words, the rates will plummet then, so to avoid getting caught out, make a note in your diary to ditch and transfer.
4. The top fixed deals pay up to 4.5% AER
With fixed ISAs, you lock cash away for a period in return for guaranteed rates. You can access your cash before then, but there are heavy interest penalties if you do so. Top payers include Halifax paying 4.25% to 4.5 % if you lock away for 3-5 years, plus BM Savings at 4.05 % for two years and Santander at 3.5% for a year.
Intriguingly, Santander also has a two-year deal at 4%, but it pays 4.1% if Rory McIlroy wins a major. Again, the best buys do change regularly, so check before getting them.
5. Once in, it's tax-free, year after year
The gain isn't just for this year. Once in an ISA, your savings remain free of income tax, year after year.
6. You needn't stick to one provider
Don't think the "you can only have one new cash ISA per year" rule means "you can only have one cash ISA". Even if you have existing ISAs, you can open a new one now with a new provider. The golden rule is: you can only open a cash ISA with one provider in a tax year, you can't split it.
7. Even at 3.5% tax-free, it can beat 5% normal savings
With normal savings, a basic taxpayer loses 20% interest in tax, higher 40%, top 50%. So to earn the same as a 3.5% ISA, a basic taxpayer needs normal savings at 4.4%, higher rate 5.8% and top rate 7% — virtually impossible.
8. It's what you 'put in' that counts
No, I'm not growing long hair (chance'd be a fine thing) and becoming a hippy. You're allowed to PUT IN £5,640 by 5 April 2013. You can withdraw it anytime, but then it can't be returned.
The best way to explain is with an example. Suppose you’ve put £5,000 in this year, and you've £640 more allowed. If you then withdraw £1,000, that's irrelevant, you can still only put £640 more in.
9. Earn £100s/year more on old ISAs too
Many banks entice you with flashy rates then slash 'em later. ISA providers love us to think once our money's in, it’s a done deal. This is wrong. You’ve a right to transfer past years' cash ISAs to the new best buys – if you've got serious cash saved in them, this can make a massive difference.
Many of the fixed deals above allow transfers in. If you’re looking for easy access, the best payer allowing new cash & transfers are NatWest at 3.5% AER if you’ve £30,000+ or Santander's 3.3% AER deal (min £2.5k). Though, again, the rates on these will drop in a year so you’ll need to diarise to ditch and transfer. For more help and daily updated options, see moneysavingexpert.com/ISAtransfers
10. Don't delay, open it now
You can always add to it later. Thinking, "I've still a year to get one"? Well, first of all, rates are usually much higher at this point in the year. Plus, the earlier you start, the longer you're earning interest that's tax-free.
Finally, remember that provided your money is in a UK-regulated bank or building society, it’s protected under the Financial Services Compensation Scheme for up to £85,000.
I’ve focussed on cash ISAs, as investing isn’t my thing, but you can use your ISA for that too, although the tax-advantage is more limited.
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