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The new savings rule that could beat low ISA rates

Three quarters of us in the UK have some form of savings, and a new rule on tax-free interest could mean the best place to put that money is set to change.

It’s been a frustrating few years to be a saver. Interest rates on most savings accounts and ISAs have been hovering around 1.5% in that time, with many older accounts offering even less. Though a third (34%) still use an ISA for their savings, nearly half (46%) keep their money in their current accounts, according to new research from Nationwide.

How tax-free savings will change

An ISA has generally been one of your best options, particularly since you can earn interest on your savings and not pay tax on it. If you put your money elsewhere, it would automatically have 20% tax taken away before it even reached your account.

That all changes with the introduction of the ‘personal savings allowance’, which starts in April.

If you’re earning less than £43,000 each year, you’ll be able to earn £1,000 in interest on your savings and not pay any tax on it. That’s a huge amount which most normal savers won’t even get close to.

Earn more than £43,000? Well if you’re in the 40% tax bracket, you can earn £500 in interest tax-free. Still a huge amount for most people.

This is on top of any interest from an ISA, no matter the kind of account.

Better interest rates in current accounts

The best easy-access interest rates right now will probably be in a current account.

The competition for customers among the banks means you can earn as much as 5% in interest, and sometimes even get additional bonuses too.

 

However, there are limits. You can generally only save a few thousand pounds in the higher paying accounts, though you can open more than one account with different banks.

You might even need to pay a monthly fee, have regular direct debits or ensure a minimum monthly payment into the account.

And, unlike ISAs and savings accounts, you’ll be credit checked each time you open one.

Regular savers can earn even more

Depending who you bank with, some banks offer Regular Savings accounts with 5% or 6% interest. These are great if you put away up to £300 each month from your salary.

When an ISA could still be for you

If you like the look of the high rates available in a current account or regular saver account, it doesn’t mean you shouldn’t consider an ISA too. Here’s when one could work for you.

You’re saving for your first home

The new Help-to-Buy ISA is a great option for anyone looking to buy for the first time. As well as rates as high as 4% available, you will be able to get a 25% bonus on your savings towards your deposit.

 

You have a high level of savings

If you’ve been saving for a few years, or received a lump sum, you might find the current accounts only cover a small proportion of your nest egg. ISAs are probably still your best option for receiving interest on the rest.

If interest rates rise

Money you save in an ISA each year (up to the annual limit of £15,240 in 2015/16), stays as an ISA year after year. If interest rates were to rise to levels before the credit crunch, the £1,000 personal savings allowance would be hit much faster, but any interest earned in an ISA would remain tax-free, even above the allowance.

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  • D Cooper / 8 April 2016

    Hello I wonder if anyone can help. I have an ISA and the rate goes down in May. My provider is advertising a better rate for a new isa, but when I asked them about the rates they said that would also go down in May. Does this mean that rates advertised by all banks now are not going to hold past May? I understand rates are variable but to already know that they intend reducing them in May seems misleading. Should I wait until May to sign up for this year when rates will be settled?
    Thank you.

  • Gordon Steed / 7 April 2016

    If you have an ISA maturing say £20K can you put £10K in an ISA and £10K
    in a current account?

  • Leslie endean / 22 March 2016

    As a non tax payer (carer) l have found that isas in general pay lower rates. So I put money into the isas end of march each year. Santander pay 3% £3,000 -£20,000. You can have 3 accounts. Yourself your spouse plus joint. Other savings go into other current accounts paying 4-5% with a linked monthly regular saver. Unfortunately these are only for one year. Luckily I invested in fixed rate bonds over 3-5 years. I make use of marriage allowance to increase my personal tax allowance. I know people have had problems using the Internet to do this. All it took was a phone call. Insure both parties are present for the call.
    unsalaried people can also put £2,880 into sips which government top up to £3,600 months later. If you then cash in each year as an uncristalised pension lump sum and keep all income including this below per allowance you get it all tax free.
    Even if you end up paying tax you will still make money. Eg £3,600 ist 25% free therefore £2,700 taxed is £540. This is £180 less than the £720 you received as tax relief on opening the sip. Profit therefore is still £180.

  • Ian Leedham / 22 March 2016

    Is the personal savings allowance an automatic thing (I assume it is), or does it have to be applied for? I was expecting a 'call to action', or at least a statement saying that all this happens automatically so you don't have to do anything (which I'm assuming is the case). Thanks.

  • Peter Lewis / 22 March 2016

    How much would you have to save to get anywhere near £1000 savings allowance?

  • Nigel Featherstone / 21 March 2016

    Really useful articles, well written and easy to follow, well done MAS

  • M. Gregg / 21 March 2016

    If we can have £1000.00 tax free each then why isn't it equal opportunities?
    How you may ask, well give everyone the choice of £1000.00 of tax free savings or £1000.00 extra tax allowance so the ones that can't save still benefit. Interesting isn't it! It only favours those who can save!

  • O.WILLIAMS / 21 March 2016

    You have not mentioned the change in tax on Dividends where £5000 will be free of tax.
    What I am not clear about is will the company paying the dividend no longer ded8uct the 10%.

    The £20000 Isa in April 2017 will not be a lot of benefit to many people because they will not have that amount of money to invest

  • Chris Scott / 20 March 2016

    If you don't smoke or drink or rarely go out for an evening, then you might be able to save, which is what we (my wife and I) do but at the age of 76 years I am still working Part-time, thank God and I am not taking the Lord's name in vane, again thank God I have 2 pensions, otherwise I don't know how we would exist or save, I pity the youngsters in our society.

  • kristina thomas / 20 March 2016

    am unsure about whether I need to pay tax on my savings of which part is a one off lump sum payment from a pension
    -----
    Admin: Hi Kristina, you can call the Money Advice Service on 0800 138 77 77 for free, impartial advice

  • mr.j.burgues / 20 March 2016

    have a joint savings account with my wife will we get £1000 each of on this account or only £1000 for the both off us

  • M. Gregg / 20 March 2016

    What do savings rates mean when most people can't save anything because they need the money to live? Anyone would think jobs pay fantastic wages where you have so much spare cash you don't know what to do with it! Just look at women's pensions every woman has had 5 years pension taken off them and nobody said anything. work it out how much has been taken off them how much per year times five? It beggars belief really you would think why would a man be concerned about women's pensions (Because its income for retirement added to a married couple that you now have to wait for another five years). I feel for Rosie and I'm a man! Pensions with so many hands stirring the pot so nobody knows where they stand. The youth of today who will probably never live to see a pension, people living longer what a farce, yes they might live longer it probably means spending years disabled or seriously ill. People working until they are seventy! Yes I can see that as a steel erector or airline pilot/bus driver with pace makers fitted.
    "Were all in" read the small print so you earn just enough not to qualify for a means tested state pension.

  • Rosie / 20 March 2016

    If I had my life again I wouldn't bother saving and I wouldn't bother working long hours, and travelling to and from work several hours a day, just to get a good income in order to save for my retirement. I saved all my life - workplace pensions (now worth next to nothing due to maladministration), normal building society accounts, plus TESSA's, ISA's, PEP's and buying shares, but had to use all my life savings in order to survive financially through four redundancies. The last was at age 50 (ageism), when I suddenly seemed to be "unemployable" in all but low paid or voluntary work for 10 years thereafter. No State support to get back on my feet (and a refusal to even pay basic Job Seekers Allowance because I had been self employed for a few months during the last 4 years of my career, and the Job Centre were still treating me as self employed when I had been employed for the last 3 years of my career). I was forced by the Job Centre into calling a hobby "self employment" so they could get me off their books - a loss making business for several years. Then I had 6 years of my State Pension taken away from me, with just 3 years' notice (and only because I requested a State Pension Forecast when I was approaching age 60, otherwise I would have had no written notice of the delay!). Have far less money now than at any time in my adult life, and am having to take handouts from family and close friends, with no assistance from the State after working full time 35 years and paying higher rate tax for the latter part of my career. Interest rates mean nothing when you can't afford to live on a daily basis, let alone save.

  • W H C McCrae. / 12 March 2016

    I was told to save up for a rainy day, now seventy still poor interest rates for savers how do you expect young ones to pay into ISA, and Pensions funds only to be let down by our MP,s you will never be able to save if you are working class.