Savers who have still to use their 2014/15 tax-free cash Isa allowance have less than a fortnight to decide where to put their money before this tax year ends.
For savers planning for the long term, the decision became more complicated after last week’s Budget speech, when the Chancellor announced that a personal savings allowance would be introduced on 6 April 2016.
Under this allowance, basic-rate taxpayers will pay no tax on the first £1,000 of savings interest they earn in a tax year, regardless of whether they are in an Isa or not. Higher-rate taxpayers won’t pay a penny of tax on the first £500 they earn.
This has led to suggestions that cash Isas will become irrelevant for all but the highest earners in the UK.
Here, Which? evaluates the best savings rates available for the short-term, medium-term and long-term future.
Best savings options
If you’ve got some money to put aside but know you want to get at it before April 2016, then the introduction of the personal savings allowance has no impact on your plans. You are best off looking at instant-access cash Isas or high interest current accounts.
Savers can currently earn up to 5% on funds stored in a current account, which is much higher than anything than a cash Isa or taxable savings account can offer.
However, it’s worth bearing in mind that current accounts only pay interest on balances up to a certain amount.
Savers with between £3,000 and £20,000 can earn 3% before tax in Santander’s 123 account. Nationwide and TSB also boast top-paying current accounts, offering 5% before tax on balances up to £2,500 and £2,000 respectively.
The best-rate instant-access cash Isa currently on the market pays just 1.50%, although it’s tax-free and payable on your entire balance. You can get up to 1.65% if you’re willing to fix for a year. You are allowed to put up to £15,000 in a cash Isa this year.
Which? Money Compare table: Instant-access cash Isas – hundreds of deals compared
If you’re willing to lock-up your savings until after April 2016, your decision becomes slightly more complicated.
You need to think about whether you are happy to take advantage of higher interest rates available now on fixed-term Isas or want to wait to see what interest rates are offered on traditional savings accounts when they become tax free in April next year.
The advantage of these traditional savings accounts is that unlike Isas, most have no annual allowance attached to them, meaning you could start earning interest on your entire balance as soon as you’ve transferred the funds into this type of account.
From April 2016, your interest will be tax free as long as it’s less than £1,000 a year for basic-rate taxpayers (£500 for higher-rate). So, unless you have a significant sum stored away, it’s unlikely you’ll have to pay any tax on your savings interest.
The best rate currently available on a two-year or a three-year fixed rate Isa is 2.10%.
For traditional savings accounts, the best fixed-rate deals available now are 2.20% on a two-year fixed-rate savings account, or 2.60% if you’re willing to lock up your funds for three years.
Which? Money Compare table: Fixed-rate savings accounts – hundreds of accounts compared
Isas still have some benefits over traditional savings accounts, especially if you’re saving for the long-term future.
Even if you don’t have enough funds to take you over the personal savings allowance now, you may do if you continue saving steadily for a few years, especially if interest rates rise from their historic low. For example, £35,000 in an account paying 3% interest annually would earn £1,050 – taking you over the allowance.
If this does happen, you’ll be able to move some funds out of a savings account into an Isa, but not more than your annual Isa allowance will permit. In 2014/15, the maximum amount of funds you can place is an Isa is £15,000. In 2015/16, it rises to £15,240.
So if you want to be absolutely sure you’ll never pay tax on your interest, you’re better off keeping all your funds in a cash Isa. You won’t ever to have pay tax on interest gained from your nest-egg, no matter how large it grows.
If you are willing to lock up your savings in a five-year fixed-rate cash Isa now, you can get returns of up to 2.75%.
Which? Money Compare table: Fixed-rate cash Isas – hundreds of deals compared
Find a great deal with Which? Money Compare
It’s tough to find the best rate on your savings and cash Isa, but Which? is here to help.
The Which? Money Compare tables let you search hundreds of savings accounts and cash Isa deals from companies large and small so that you can find a great home for your nest egg. We also combine this with our unique customer scores that show you how well the provider you pick will treat you in the long run.
- How to find the best cash Isa – what to look for
- How to find the best savings account – see our expert tips
- Call the Which? Money Helpline – your financial queries answered
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