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Cash ISAs – is it really all over?

Is the Cash ISA still worth it? They’ve been around for 20 years now. Though once a tax haven, due to recent changes, the question now 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 is what most people mean when they refer to an ‘ISA’. Essentially, this is like a normal savings account but you where 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:

1.All interest earned is tax-free

2.Put in a maximum of £20,000 per tax year (in total across all of your ISAs)

3.Pay in by end of the tax year, April 5th or lose any remaining allowance

4.You can only pay into one Cash ISA per year (you can pay into other types of ISA in the same tax year)

5.Cash ISAs can be combined (only those in your name though – Joint ISAs don’t exist)

Are Cash ISAs better than a savings accounts?

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 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.

The Personal Savings Allowance

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.

For example, let’s take a basic rate taxpayer with a normal savings account and a 3% interest rate. They could have approximately £33,000 in savings without being taxed. The reality is though, that even 1% rates are rare these days. That means 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.

Interest rates

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

For most people, the Personal Savings Allowance and tragic interest rates have decimated the original Cash ISA advantages. But what about the remaining few?

Well, there are still people that have large sums saved, taking them well above the £1,000 PSA (Personal Savings Allowance). And then there are the higher or additional rate taxpayers who get much less or even no benefit from the PSA. For these people, 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 2021/22?

The current limit that you can put into a Cash 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. This includes a Cash ISA.

Some types 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 its 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 release new Cash ISA products. This is particularly true of the digital, challenger banks such as Marcus.

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 0.6% interest.

So, many people got excited when Marcus launched its Cash ISA in April 2021. Sadly though, this still only offer 0.6% (which includes a 0.10% bonus for 12 months). And it is not a flexible ISA, so whilst you can take money out, it can’t be replaced within your tax-free allowance.

Cash ISA Summary

Cash ISAs don’t offer the same advantages that they did. So, for most people, a high-interest savings account may offer greater flexibility. But for high earners with large savings, Cash ISAs 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.

 

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