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Are Isas still worthwhile?

Does the personal savings allowance make cash Isas redundant? Read the Which? guide to tax-free savings to decide whether cash Isas are still a good home for your savings.

In this article
Do I still need an Isa? How does the personal savings allowance work?
Should you ditch cash Isas?  Keep an eye on falling savings rates

Do I still need an Isa?

Isas and standard savings accounts are now on equal footing, thanks to the personal savings allowance which was introduced on 6 April 2016. 

For the 2022-23 tax year, basic-rate taxpayers can earn £1,000 tax-free on any interest from savings or current accounts. Higher-rate taxpayers are entitled to a smaller allowance of £500.


How does the personal savings allowance work?

The government estimates that 95% of savers no longer pay tax on their savings.

Under the old system, your bank or building society would automatically take off basic-rate tax (20%) from any savings interest. 

Today, they pay all savings interest gross (without deducting tax) so you don't have to do a thing if your combined income from savings falls below your personal threshold. 

Should you ditch cash Isas? 

Now that Isas aren't the only way to earn interest tax-free on cash savings, it may make sense to simply plump for the best available savings rates, which could well be non-Isa savings accounts or high-interest current accounts

But, we think Isas are still attractive, particularly if you're a higher-rate taxpayer, or if you are at all likely to become a higher-rate taxpayer later on. Here's why:

Isas future-proof your savings

Isas become more valuable over time. If you maximise your allowance each year, you can accumulate large sums in a tax-free shelter.  

Although the personal savings allowance seems generous while interest rates are so low, what happens when rates start to rise? 

If you were currently earning a rate of 1.5% for 12 months, rising to 2.5% in year two, and 4% in year three, a pot of £50,000 would earn £4,100 in interest over three years. 

In this scenario, a total of £1,350 of that interest would be liable for tax if you're a basic-rate taxpayer and £2,600 if you're a higher-rate taxpayer. 

Isas are more flexible (but check your provider)

Some flexible Isas allow you to withdraw funds from an Isa and replace it, without it affecting your annual Isa allowance - as long as you do so in the same tax year.

The sticking point is that Isa providers are not obliged to offer this facility, so you may not be able to make use of this new flexibility yet. 

At the moment, Nationwide offers fully flexible Isas, while Barclays, Lloyds (also Halifax and Bank of Scotland) and Metro Bank offer flexibility on some (but not all) cash Isas. 

HSBC, Post Office, Santander and The Co-operative Bank do not offer additional flexibility on any of their Isas. 

Couples can inherit each other's Isa allowance 

Since April 2015, spouses and civil partners can pass on their Isa savings tax-free. 

The surviving partner is entitled to an 'additional permitted subscription,' or APS allowance. This is a one-off additional Isa allowance equivalent to the value of the deceased person's Isa at the time of death. 

Keep an eye on falling savings rates

Easily the most important message for savers is to keep an eye on rates - whether you save in an Isa, a standard savings account, or a current account. 

As long as you have at least £500 saved, you must be given 14 days’ notice of any material reduction in rates, or the end of any bonus or introductory rate. 

A material change means a cut of more than 0.25%, or an overall reduction of more than 0.5% over 12 months.