ISAs (Individual Savings Accounts) are a particularly useful planning opportunity, yet I continue to be surprised with a general lack of understanding or appreciation of these accounts.

Most people would prefer to pay less tax or at least reduce their exposure to it. It is something most people and businesses pay and ultimately helps fund hospitals, roads, emergency services and much more. There are opportunities all around us, to help reduce your tax liability but few as simple, and widely available as the ISA. All gains and income within an ISA are free from tax.

The Personal Savings Allowance (PSA) was introduced in 2016, which allows basic rate taxpayers, to earn up to £1,000 of interest per tax year, tax free. For higher rate (>£50,270) taxpayers, that reduces to £500 per tax year and additional rate (>£125,140) it’s zero.

According to a recent study by Yorkshire Building Society (YBS) found over £366bn was languishing in UK savings and current accounts earning <1% interest. That’s a huge amount of money and it will cover people with both modest and sizable cash position.

I’ve noted four considerations for you and your cash:

Check what your cash is earning

1. 1. 17% of respondents in the YBS survey said they had never checked the interest rate on their savings
   2. Financial admin might not be top of your list, but even reviewing and taking advantage of available rates from your existing banks/building society and increasing the rate you’re getting, would be a start
   3. Once you know what interest you’re being paid, consider whether this money could be within an ISA and receiving it tax free

Make active decisions

1. 1. 33% of respondents in the YBS survey said all of their cash was in their current account
   2. Current accounts typically pay little or no interest and are designed for day-to-day transactions, rather than holding larger sums of money
   3. If you don’t want to move money to another financial institution, most providers will offer ISAs and it’s likely to pay more interest than the current account

ISAs offer more than just cash

Cash ISAs are the most common type of ISA. In recent years, interest rates have been very low and  many people saw little benefit in sheltering money within an ISA, without necessarily considering where rates / returns might go and associated tax consequences.

You could invest the money, through a Stocks & Shares ISA, retaining the tax benefits and broadening the opportunities for your money. Investing involves risk and the value of the ISA can go down as well as up. Don’t forget, ISAs are available for children too, called Junior ISAs.

I’ve got £30,000 saved – what’s the point in using an ISA?

Money is relative, but if you have £30,000 in a cash savings account, earning 4% interest, over a year that would generate interest of £1,200. That means you’re liable to tax on the interest over & above your PSA, at your marginal tax rate (e.g. 20%/40%/45%). If you were in a fortunate position to save £20,000 per annum, and you did it for 5 years, and NOT used an ISA, with £100,000 earning 4% = £4,000 of interest. At least £3,000 of that is taxable and if you’re saving >£20k p/a, it’s likely that you are at least a higher rate tax payer, meaning a further tax liability of £1,400.

Use the ISA as a flexible savings vehicle

There are fixed-term ISAs, but unless you have certainty knowing that you don’t need access to the money, the benefits of flexibility that most ISAs cash & stocks & Shares ISAs offer, is something to retain. Withdrawals from ISAs are tax free, meaning that other than if you use a fixed-term account, you could access your ISA money, as & when – whilst knowing that any interest or gains are tax free.

For maximum flexibility, some ISAs are known as ‘Flexible ISAs’. This means that, for example, if you contribute £20,000 into an ISA and then make a withdrawal of £10,000, with a flexible ISA, you can put £10,000 back into the ISA, without it counting towards the allowance for that tax year.

Many ISAs are not Flexible in strictest sense, so take the time to check.

If you would like to understand more about the potential of ISAs and how they could work for you, get in touch, we’d love to chat.

Thanks for reading and enjoy the journey!