The only people who consistently do better by putting their money into a cash ISA are
- top rate taxpayers (with incomes above £150,000 a year)
- higher rate tax payers with incomes above £45,000 a year and many tens of thousands in cash ISAs
The deception at the heart of the cash ISA is this. For 95% of savers there is no tax saving to be had by putting their money into an ISA. That is because interest on savings is tax free for 95% of savers anyway.
Since April 2016 the first £1000 of savings interest is free of tax thanks to the new Personal Savings Allowance (what did the Editor of the Evening Standard ever do for us?). For those who pay higher rate tax the Allowance is £500 and the growing number of top rate taxpayers - with an income above £150,000 - get no Savings Allowance. But for the vast majority of savers who pay basic rate tax or none at all they get £1000 interest tax-free.
At today's low interest rates, savers would have to have more than £90,000 in cash savings in a best buy instant access account - RCI Bank paying 1.1% - to exceed their £1000 Personal Savings Allowance. If they put their money into a longer-term account - say a 2 year bond - then they would need around £57,000 in the best buy Charter Savings Bank which pays 1.76% before any tax was due on the interest. The Personal Savings Allowance is of course personal, so for a couple you can double those limits.
Those are best buys. But most people are not rate chasers. Many entrust their savings to the High Street banks. If you have your money in the promoted Aldermore instant access account paying 0.75% you would need more than £130,000 to pay tax on the interest. And you could put £2,000,000 into a Barclays 'best buy' instant access savings account paying 0.05% before the interest would attract tax.
So for the vast majority of savers who pay basic rate tax the interest paid on their savings is tax free outside an ISA.
But that key deception is just the first.
The second deception is that even if tax is due you could earn more in a non-ISA account. That two year bond from Charter paying 1.76% is so far ahead of the nearest ISA account that money earns more in a best buy non-ISA savings account even after basic rate tax is taken off. Deduct basic rate tax from that 1.76% and you are left with 1.41%. But the best buy two year ISA is from Britannia building Society and pays just 1.25%. In fact every best buy fixed term ISA savings from one year to five years is better or the same in a non-ISA account after basic rate tax.
The table shows the best buys that are worth more or the same as a cash ISA.
Tax haven for the better off
The people who do better with an ISA than a regular savings account are higher rate taxpayers. They get a lower Personal Savings Allowance of £500 and get more interest in an ISA than the net after tax interest on a non-ISA.
Cash ISAs are for the better off. Higher and top rate taxpayers and those with at six figure sums in cash savings. They are no longer for the ordinary saver.
Helping the rich rather than ordinary savers was never the purpose of the cash ISA. It is time it was scrapped for future savings.
These thoughts were first expressed in Time to Scrap the ISA Tax Haven written for FT Money online on 30 May 2017 and in the newspaper 3 June 2017.
2 June 2017