Why ISAs are still relevant

by Leeds Building Society

In last year’s Budget, the chancellor, George Osborne, announced the introduction of the Personal Savings Allowance (PSA). This came into force on 6th April 2016. In essence, the PSA means that the majority of people in the UK will be able to earn up to £1,000 a year in savings interest without having to pay any tax on it. Some people have said that the PSA will mark the end of the Individual Savings Account (ISA)*, but, in fact, there are still many reasons why opening an ISA remains an excellent choice for savvy savers. Here’s our roundup.

An ISA has genuine tax-free status

Up to £1000 of interest can be earned tax free via the PSA but it’s important to highlight the ‘up to’ part of this statement. Basic rate tax payers (that’s anyone earning up to £43,000 per year and pay tax at a rate of 20%) can earn up to £1,000 interest but if you fall into the higher rate tax payer category (40%), you’ll only benefit from £500 tax free interest and if you are an additional rate tax payer (45%) you do not get a PSA.  That’s not the case with an ISA which has genuine tax free status for everybody irrelevant of your salary or other income you receive.

Benefit from both the PSA and ISA

The PSA does not affect ISA’s in anyway. So, as long as your money is in an ISA, the interest you earn will always remain tax free. If you take full advantage of the maximum ISA allowance each tax year, you’ll have yourself a good sum of money saved in a couple of years’ time. And for those who have already built up ISA balances there is a real advantage to maintaining them.

An ISA can help you buy a home

The Government have announced a number of initiatives to help savers buy a new home by way of an ISA. In December 2015 they launched the Help to Buy: ISA which will boost your savings by 25%.  So, for every £200 you save, the Government will pay a bonus of £50 up to a maximum of £3,000. In addition, as part of its latest Budget, the Government announced the introduction of the Lifetime ISA, which will become available in 2017. If you’re 18 to 40 you’ll be able to save up to £4,000 a year with the government contributing up to £1 for every £4 paid in. The savings accrued in a Lifetime ISA will be completely tax-free so long as they’re used to buy a home or withdrawn once the saver turns 60.

ISA’s remain a fantastic way to save, whether you’re saving for something specific, like a wedding or buying your own home, or you’re looking to the long- term and creating a pot of money for your future. Even in this constantly changing and fluctuating money market place, it’s just as relevant as ever.

* Leeds Building Society only offers Cash ISAs. Cash ISAs are available to individuals aged 16 and over who are resident in the UK for tax purposes.