Cash ISA’s – What’s the point?

With the introduction of the Personal Savings Allowance in April 2016, many people stopped seeing the point in keeping their savings in Cash ISA’s, as after all, they won’t be taxed right?

True in many cases, but that doesn’t mean that they can’t benefit you.

If you don’t know, the Personal Savings Allowance means that basic rate taxpayers get their first £1,000 of savings interest tax-free and higher rate taxpayers their first £500. For those that earn under £17,500 in a year, you may also be able to receive up to £5,000 of interest in addition, tax-free through the Starting Rate for Savings.

A Cash ISA is a savings account that gives tax-free interest. An individual can put in up to £20,000 per year into a Cash ISA.

So why could a Cash ISA benefit me?

1. You earn more in savings than is tax-free, fully utilising the any Personal Savings Allowance and Starting Rate as mentioned above.
2. Extra benefits associated with the ISA’s. For example, the Help to Buy or Lifetime ISA.
3. You receive dividends at a higher/additional rate of tax. While the interest that you receive from a non-ISA bank account may be tax-free, it will use up your basic-rate/higher-rate tax band, effectively making other income more expensive.

For example:

Sally owns a Deli. Sally pays herself a salary of £12,500 per year and takes an extra £50,000 in dividends from the profits in her company. Sally also earns £500 in bank interest.

If this is interest from a Cash ISA, Sally will pay the following in tax:

Income	Tax
£12,500 Salary	£0 (Covered by her Personal Allowance)
£500 ISA interest	£0 (Not included as taxable income)
£50,000 Dividends	£6,725 (£2,000 taxed at 0%, £35,500 taxed at 7.5%, £12,500 taxed at 32.5%)

If this is interest from a usual bank account, Sally will pay the following in tax:

Income	Tax
£12,500 Salary	£0 (Covered by her Personal Allowance)
£500 Savings interest	£0 (Covered by the savings rate)
£50,000 Dividends	£6,850 (£2,000 taxed at 0%, £35,000 taxed at 7.5%, £13,000 taxed at 32.5%)

Sally will therefore save herself £125 per year if she transfers her savings into a Cash ISA.

If you would like more tax-saving ideas or discuss your personal tax matters, please feel free to set up a free consultation to see if we could lower your tax.
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