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Cash ISAs – is it really all over?

5 minutes to read

Is the Cash ISA still worth it? They’ve been around for 20 years now. Though once a tax haven, now due to recent changes the question is: are they still worth having? And are they better than a standard Savings Account? Maybe, maybe not, depending on your circumstances. We take a look at what Cash ISAs are and when they are still worth having.

  1. What is a Cash ISA?
  2. Cash ISA’s: Five need-to-knows
  3. Are Cash ISAs better than a savings account?
  4. When Cash ISAs ARE worth it
  5. Cash ISAs vs Savings Account
  6. What is the Cash ISA allowance for 2019/20?
  7. Types of Cash ISA
  8. Marcus Cash ISA
 

What is a Cash ISA?

With a standard savings account, you are taxed on the interest that your money makes.

A Cash ISA (which is what most people mean when they refer to an ‘ISA’) is really just a normal savings account but you don’t pay tax on the interest. This is why an ISA is known as a ‘tax-free wrapper’.

That makes it nice simple for you and Mr. Tax Man.

Not sure which ISA is right for you? See our Complete ISA Guide and check out the flow chart!

 

Cash ISAs: five need-to-knows

Cash ISAs at a quick glance:

  • All interest earned is tax-free
  • Put in a maximum of £20,000 per tax year (in total across all of your ISAs)
  • Pay in by end of the tax year, April 5th or lose any remaining allowance
  • You can only pay into one Cash ISA per year (you can pay into other types of ISA in the same tax year)
  • Cash ISAs can be combined (only those in your name though – Joint ISAs don’t exist)
 

Are Cash ISAs better than a savings account?

First up, let’s be clear: we’re talking about Cash ISAs here. This is what most people mean when they ‘ISA’. But it’s important to remember there are actually five (technically six) types of ISAs. They are all quite different and the arguments against Cash ISAs don’t apply to the other types.

Before 1999, when Cash ISAs were introduced, savers were taxed on their stash inside regular savings accounts from their bank. Then ISAs came along, which meant they got to keep all that lovely interest their money earned.

For 17 years they were the ‘darling’ of the savings world. Then in 2016, the Personal Savings Allowance was introduced, which meant basic rate taxpayers could now earn up to £1,000 in interest without being taxed.

For a 40% tax-payer though, this reduces significantly to £500 and for an additional-rate payer, a big fat £0.

That means that today, a basic rate taxpayer with a normal savings account and a 3% interest rate, could have approximately £33,000 in savings without being taxed. The reality is that even 1% rates are rare these days, meaning you would need over £100k in savings to breach the threshold. As a result, 95% of people don’t have to think about the tax implications of their savings, so Cash ISAs lose their once-shiny appeal.

The other thing to consider is interest rates. Cash ISAs offer interest rates that are generally woeful. Compare the best fixed-rate Cash ISA available from Shawbrook Bank offering 2.3% to the First Direct regular saver with a whopping 5%. That’s over double! For a £10,000 saving pot, that’s a £370 difference per year over 10, 15 or 20 years, even before compounding!

So for most people, Cash ISAs have lost their lustre and high-interest savings account are a better bet. Except…..

 

When Cash ISAs ARE worth it

So whilst the Personal Tax Allowance and tragic interest rates decimate the original Cash ISA advantages for 95% of people, what about the remaining 5%?

For those that have large sums saved taking them well above the £1,000 PSA (Personal Savings Allowance), or those that are higher or additional rate taxpayers and therefore don’t see any real benefits of the PSA, Cash ISAs can deliver precious tax advantages that make a real difference over the long term, particularly if and when interest rates increase.

 

Cash ISAs vs Savings Account

Key considerations in a nutshell:

Check out Savings Champion for an independent Best Buy list of savings accounts.
 

What is the Cash ISA allowance for 2019/20?

The current limit that you can put into an ISA is £20,000 in a single tax year.

Remember though, this limit applies to all of your ISAs. If you’ve already put in £10,000 to your Stocks and Shares ISA, you only have £10,000 left for your others, including a Cash ISA.

Some type of ISA, such as the lifetime ISA have their own specific limits. Check out the ISA Allowance table for each type in our Complete ISA Guide.

 

Types of Cash ISA

Even within Cash ISAs, there are different types, each with their own set of conditions that will suit different requirements.

Fixed Rate ISAs

  • Typically higher rates
  • Fixed-term – you usually can’t withdraw your money without penalty during the term
  • Check for minimum/maximum savings limits
  • Some don’t accept transfers

Variable Rate/Instant Access ISAs

  • Typically lower rates
  • Interest rate can go up and down
  • Put in and take money out when you want – usually no limits
  • Ideal for ‘rainy day‘ funds
 

Marcus Cash ISA

Despite the eroding benefits of the Cash ISAs, we are still seeing new players, particularly the digital, challenger banks such as Marcus, releasing new Cash ISA products.

Already a firm favourite with digital bank enthusiasts and general savers, Marcus is a relatively new personal banking service from Goldman Sachs.

One of the main reasons for its popularity is due to a market-leading high-interest saving account offering 1.0% interest.

Even more excitingly, in May 2019 Marcus hinted that it may be throwing its hat into the Cash ISA ring with a market-busting 1.55% interest (if you get excited by 1.55%, of course).

Cash ISAs don’t offer the same advantages that they used to, so for most people a high-interest savings account is better. But for high earners with large savings, they still have a place and offer powerful tax-free returns in the long run.

 

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EatSleepMoney.co.uk does not offer financial advice and is intended for reference/information only. Remember, you should always carry out your own research and/or take specific professional advice before choosing any financial products or services or undertaking any business or financial venture. Investments may go up as well as down and you may get back less than you put in.