Savers Make the Most of Tax Breaks on ISAs

Consumers like the more generous ISA allowance – but low interest rates and stretched finances are preventing some from saving

Karen Kwok 24 February, 2016 | 3:32PM

 

 

As this tax year draws to a close, savers are aware that the ISA clock is ticking.

Most savers know the ISA allowance has increased significantly in recent years: for the 2015-16 tax year this gives all adults in the UK a tax-free savings allowance of £15,240.

And it is clear that investors like getting something for nothing. Interest rates may be very low, but savers agree that they would rather save into a tax-free ISA, than a regular savings or investment plan where returns are taxed.

These low interest rates have hit pensioners in particular, many of whom rely on the interest paid on cash ISAs to supplement their retirement income.

ISAs though continue to appeal to younger savers: they offer more flexibility than pensions, for example, with savers able to access their funds at any time. Savers have the option of keeping their money in cash, or opting for longer-term investment ISAs. Savers can split their annual allowance between cash and investments, and then switch money between these asset classes at a later date, without losing this tax break.

Under current rules the interest paid on cash ISAs is tax-free. However, it remains to be seen whether cash ISAs are as popular next year: from April 2016 the first £1,000 of interest paid on your savings will be tax-free (for higher-rate taxpayers this will be reduced to £500).

Investment ISAs are not subject to Capital Gains Tax and there is no further income tax to pay on bond yields or share dividends; however ISA investors can’t claim back to 10p tax credit on dividends which is deducted at source.

We asked savers in London what they were planning to do with this year’s ISA allowance. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk

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