The Chancellor could halve the current cash Isa limit from £20,000 to £10,000 in her November Budget, it has been reported.
Rachel Reeves has been looking to grow investment in the UK stock market and encourage more people to invest in the stocks and shares Isa.
As part of these plans, she could cut the current cash Isa limit – although this will likely cause fresh outrage.
Earlier this year, building societies argued against calls by City firms to scrap the cash ISA, warning any change to savers could have negative consequences.
ISAs allow those with cash to put aside their money to earn interest without having to pay tax on it.
We take a look at what types of ISA there are, how they work, and whether they are always the best option for your finances.
What is an ISA?
An ISA – individual savings account – is a type of product where you never pay tax on the interest. You can put up to £20,000 into ISAs each tax year, which runs from April to April.
Usually when people gain interest on their savings, they may have to pay tax.
Basic-rate taxpayers can earn up to £1,000 per year tax-free, higher rate taxpayers can earn £500 per year tax-free and top rate taxpayers cannot earn anything.
square SAVING AND BANKING Three-quarters of savings accounts pay less interest than the 4% base rate
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Money earned from ISAs do not count towards this.
What types of ISAs are there?
There are four types of ISA:
Cash ISA – where your money is held in cash. Stocks and shares ISA – where your money is invested in equities, bonds and more, and you get a return. Innovative finance ISA – a rarer type of ISA which includes peer-to-peer loans and less liquid investments Lifetime ISA – an ISA in which you can hold cash and stocks and shares combined. You can use it to buy your first home or save for later life and you can put in up to £4,000 each year, until you’re 50. The Government will add a 25 per cent bonus to your savings, up to a maximum of £1,000 per year, though there are further rules about this.Who should consider opening a cash ISA?
It is worth considering getting a cash ISA instead of a more typical savings account if you have, or might pay, tax on your savings interest.
If you are a basic rate taxpayer and have savings of £20,000 earning 5 per cent or more you will likely pay tax.
Earning the same amount of interest as a higher-rate tax payer, you would only need £10,000.
Would I still be better off with a normal savings account even though I pay tax?
According to consumer website MoneySavingExpert.com, there is a simple method to help you compare normal savings accounts (non-ISAs) and cash ISAs, to decide which is better. Take the rate on the ISA you’re looking at and multiply it by:
– 1.25 if you’re a basic-rate taxpayer– 1.66 if you’re higher-rate taxpayer– 1.82 if you’re a top-rate taxpayer
The result of that sum is the rate you need to get on a normal account for it to be a better option that your ISA. If normal savings don’t pay more than that, then you’re better off in the cash ISA.
At the moment, ISA accounts pay similar to or in some cases more than normal savings accounts.
The best easy-access ISA on the market from Trading 212 pays 4.51 per cent, inclusive of a 0.66 per cent newbie bonus that lasts for a year.
The best easy access savings account that is not an ISA is with cahoot with a rate of 5 per cent.
The best one-year fixed rate is with Marcus by Goldman Sachs with a rate of 4.55 per cent.
Is a stocks and shares ISA better than a cash ISA?
General wisdom states that stocks and shares ISAs will often outperform cash over the long term.
According to James Norton, head of retirement & investments at Vanguard Europe, “the long-term picture is that shares have historically delivered a better return than cash once adjusted for inflation.”
But he also points out that the returns on shares can fluctuate a lot, whereas with cash, returns are guaranteed.
“Everyone should have some emergency cash savings – that pot of money we should all keep aside for unexpected spending or income shocks such as a redundancy,” he says.
If you’re unsure, it may be worth speaking to a financial adviser, who can give you specific advice.
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