Cash ISAs have declined in popularity, not only in relation to stocks and shares ISAs, but also in relation to other forms of deposit. Interest rates have fallen and the attractions of cash ISAs have also been undermined by the introduction in April 2016 of the personal savings allowance (‘PSA’), which permits basic rate taxpayers to receive up to £1,000 and higher rate taxpayers up to £500 savings interest each year tax-free.
The PSA applies to income from banks and building societies, annuities, government and company bonds and unit and investment trusts and is additional to the personal allowance and the starting rate for savings.
The personal allowance (this year £11,500), is available to all taxpayers and exempts from tax all types of income, while the starting rate for savings permits up to £5,000 of savings income to be received tax-free in cases where the taxpayer’s total income does not exceed £16,500. The allowance reduces by £1 for every £1 of income above £16,500, so that it ceases to be available to people whose total income exceeds £21,500.
With interest rates at current low levels, deposits and investments of reasonably significant levels will produce interest which can be received tax-free as a result of the PSA. Interest of 1.2% p.a. would generate income on £83,333 which would be covered by the allowance, and for a higher rate taxpayer the corresponding figure would be £41,667.
The prospect is for interest rates to increase, which could tilt the advantage back in favour of cash ISAs, particularly for higher rate taxpayers. However, it might be unwise to lock into fixed-term ISAs at current rates