4 million of us pay tax on our benefits – and there’s no need at all! Savings expert
Creepy characters ended up on my desk last week. More than four million savings accounts are at risk of having to pay tax on their interest – an increase of almost one million in six months.
the reason? High interest rates and the fact that a modest, tax-free cash Isa has been ignored for years.
But Isa has made a strong comeback as the first point of contact for savers. I would encourage everyone to consider one, even those with small nest eggs.
A wave of new Cash Isa’s have been announced as interest grows. Savings app Chip will offer one for the first time – an accessible version that pays 4.75 per cent.
Coventry Building Society last week introduced its option, with a higher rate of up to 5.05 per cent if you open it online and limit withdrawals to four a year.
New deals: Rising interest rates mean Isa funds are back in force as the first port of call for savers
Others will likely follow, and I’ll keep you posted on the best ones. Cash Isa accounts are basically the same as regular accounts, but the interest is tax deductible.
Research by Shawbrook Bank suggests there are many savers who don’t understand the workings of the Cash Isa, which was launched almost 25 years ago.
But that’s no surprise – once the darlings of the savings world, they fell into the doldrums eight years ago when the Personal Savings Allowance came into play. Few people who started saving since then have had to think about going beyond their limits.
This allowance allows basic rate taxpayers to earn up to £1,000 in tax-free interest, while higher rate taxpayers can earn up to £500.
Since savings rates are now more generous, basic taxpayers will only need £20,000 in an account paying 5 per cent to get their allowance. On the other hand, higher rate taxpayers will get up to £10,000.
When this allowance was introduced, rates were so low that the amount of savings you would need to get through a tax bill on your interest was off the charts – close to a six-figure sum for basic rate taxpayers.
Savvy savers struggled to see the point of a cash Isa, as they could earn more in a regular account and pay no tax.
Service providers also abandoned it as demand declined; They faced higher administrative costs of running these accounts.
That seems fair. There was a 40 per cent gap between the highest one-year fixed rate bond at 1.35 per cent and the equivalent Isa at 0.96 per cent two years ago – before rates generally started to rise.
Now that savers are turning to cash Isas again, that spread has narrowed to less than 4 per cent: the best cash rate is 4.98 per cent from Shawbrook, and Investec’s one-year fixed-rate bonds offer 5.15 per cent.
In more accessible accounts, the gap fell from 16 percent to almost zero. The highest taxable account is 5.1 per cent from Close Brothers (although you need £10,000 to open it) versus 5.08 per cent from Zopa’s Isa, with a starting value of £1.
Some providers even pay a better or identical rate on Isa and regular accounts. The Scottish Building Society pays 4.75 per cent on both its one-year fixed rate bonds and fixed rate bonds ISA.
Rates are now so generous that it doesn’t take much to break your personal savings allotment.
The advantage of putting money into an Isa is that you won’t have to pay tax on the interest in the future if you find yourself caught in the tax net.
You can deposit up to £20,000 in cash each tax year – and you still have until April 5 to use up this year’s allowance.
New York BS account pays 6%
Highest rate: Yorkshire’s new normal saving scheme for Christmas 2024 pays 6% on savings between £1 and £150 per month
Can you do that with the hand you’ve been saving for Christmas?
Yorkshire Building Society’s regular Christmas e-savings scheme pays 6 per cent on savings of between £1 and £150 a month.
It runs until October 31, so you’ll have the money in time for Christmas shopping.
Saving £150 a month will give you around £1,540 at the end of ten months.
But check what your current account provider offers first — you can get a better rate. For example, Nationwide’s 12-month plan pays 8 per cent on up to £200 a month.
Avoid leaving money in your bank account
Savers have around £254bn in current accounts and earn no interest at all.
I understand the need to keep extra money in your account to cover your daily expenses – you don’t have to monitor what goes in and out and worry about accidentally overdrafting.
But the trick is not to leave more than that, but rather to transfer any excess to a savings account where it will earn a better interest rate.
Here’s how you can do it.
Take a look at the top and bottom of your current account balance over the past few months.
What is the biggest drop you can see in any given month? Make sure you keep this amount – plus a little extra – in your account, and transfer the rest to your savings.
You may have to keep a close eye on your checking account if you’re spending more than usual, but that’s not bad discipline.
An average account rate of 3.15 per cent will give you a worthwhile £31 on every £1,000, or £50 if you choose a high-paying account.
The amount in current accounts today is higher than when the Covid lockdown began in March 2020, and rates were low. This confirms my fears that people are leaving too much in it.
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(tags for translation) Daily Mail