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A Consumer's Guide to
Cash saving in and outside an ISA
March and April 2023 saw a record-breaking Cash ISA season ahead of the end of the tax year, with £17.8 billion paid into cash ISAs. This is nearly six times the amount of money that was paid in during the same two months in 2022. £11.9 billion was paid in during April alone.
One reason for this influx of money may have been the higher rates of interest being offered on cash deposits, following consecutive increases in the interest rate by the Bank of England. This, in turn, may also have affected the second reason, the need to protect savings returns from income tax.
Savings within a cash ISA tax wrapper are free of income tax when you draw them out. But cash savings outside of an ISA are taxed.
Tax payers saving outside of an ISA, have an annual Personal Savings Allowance, which gives £1,000 tax-free on savings and investment returns for basic-rate taxpayers, and £500 for higher-rate taxpayers. There is no allowance for additional rate taxpayers.
With the freeze on personal income tax allowances until April 2028, over time more people will move into the next income tax band. This will impact not only the income tax they pay but also their Personal Savings Allowance and how much tax they pay on savings and investment returns.
With the additional rate income tax band starting from £125,140 for the current tax year, more people will see their Personal Savings Allowance taken to zero and so will pay 45% tax on their savings and investment interest.
Despite rates of interest rising on savings accounts, they remain substantially beneath the current rate of inflation, which means cash is losing its spending power month on month. We would recommend keeping some cash in an emergency fund but then making your wealth work harder for you by investing in stock market based investments. Over time, investments usually deliver more than cash in returns. Alternatively, consider saving into a pension, which benefits from tax incentives, if you can wait until retirement to access your money.
Managing your ISA wealth
One of the issues we see when people self invest in their annual ISA over a period of time, is that often the investments can be chosen at random and are not revisited.
This means that over time, people can build up a valuable portfolio of ISA investments which could be in poor accounts or invested in areas where the levels of risk are higher than the individual would now wish to take.
Reviewing an ISA portfolio on a regular basis – we suggest annually – is crucial to ensure it is in the best account and aligns with your current investment strategy and is not taking a level of risk with which you are uncomfortable.
The value of your investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future results.
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