Has the new 0% savings rate of tax made cash ISAs obsolete?
In last week’s Budget, the Chancellor announced that the first £1,000 of savings income (£500 for higher rate taxpayers, nothing for additional rate (45%) taxpayers) would be subject to zero tax, with effect from 6 April 2016.While this won’t affect people looking for the best deals on where to invest anything that remains of this tax year’s ISA allowance of £15,000, that expires on 5 April 2015, those looking forward to this time next year might not have such a worry.
The point is, of course, that the main draw of cash ISAs was the fact that the interest arising was not taxable, saving investors at least 20% in income tax. While there have regularly been headline savings rates, or more recently, current account credit interest rates, that could beat cash ISA rates, once the tax advantage was taken into account ISAs often came out on top.
But if all savings interest is not taxed, why bother investing in an ISA? £1,000 of interest given the current low rates would require a sizeable capital balance, meaning that the tax-free status of cash ISAs is only of benefit to those who already have pots of cash.
But what about the rates? Could cash ISAs still offer better rates on a straight comparison? Which!!! looked at short, medium and long term savings rates and found that, comparing like with like, and assuming no tax is due on ISA or non-ISA savings accounts, there is currently no benefit to a cash ISA for most people.
On short term/instant access accounts, Which!!! figures show that the best ISA deal is 1.5% (1.65% if fixing for a year), compared with up to 5% payable by current accounts, although you would need to check the limits applicable to interest payments. For 2-3 year fixes, the best cash ISA deal comes in at 2.1%, whereas a standard savings account earns 2.2% for two years or 2.7% for three years.
Over the longer term, rates might rise and you have longer to build up a larger savings pot so a cash ISA may become more attractive, but currently the best five-year fixed-rate cash ISA only gives returns of up to 2.75%.
Of course, in a year’s time, the banks will also be aware that savers will be checking to see which rates are best for them, so the market may adjust to show better rates for ISAs at that time, but for now, the bell seems to be tolling for cash ISAs for the masses…