There are rumours Rachel Reeves could be considering cutting tax benefits for the cash ISA scheme – but there are alternatives
Cash ISAs have come under fire with Chancellor Rachel Reeves being called to make savers put more money into investments.
Individual Savings Allowance (ISA) accounts are a special type of savings account that allow people to put cash away each year without paying any tax on the savings. For the current tax year, savers can put up to £20,000 in their ISA without any tax fee.
However, there are a number of different ISAs which all serve a different purpose when it comes to what the cash you put away is used for. Cash ISAs take on the most traditional savings account approach with their chief purpose allowing savers to not pay any tax on interest earned through the account.
Despite this being an attractive option for savers, recent reports indicate that Rachel Reeves could cut the tax relief available on Cash ISAs. The Chancellor recently met with City firms who claimed that £300 billion held in Cash ISAs would create better results if they were instead placed in Stocks and Shares ISAs, with the Telegraph reporting that she’s considering cutting tax benefits for the scheme.
In comparison to Cash ISAs, Stock and Shares ISAs can be a bit riskier for a saver’s cash, with a much higher potential of investments bringing diminishing returns. It’s important to note though that there a wide range of ISAs out there which could still be an attractive alternative if tax benefits are cut from Cash ISAs.
Cash ISA
Cash ISAs are the most traditional form of savings account on offer and allow savers to not pay any tax on the interest earned through the account, as opposed to standard savings accounts. Furthermore, any interest earned in a cash ISA does not contribute towards the £20,000 savings limit each tax year.
There are a number of different Cash ISA types that savers can take advantage of, for example:
- Easy-acess cash ISAs – allow you to access the money saved whenever you want with no added fee
- Fixed rate cash ISAs – can provide a higher savings rate but may add a penalty if you want to take it out
- Notice Cash ISAs – if you want to withdraw the cash you will likely need to provide notice far ahead of time
Some savers may also have a Help to Buy ISA, however these are no longer available to people putting in new applications. These ISAs were designed to help first-time buyers with getting their first property by giving a 25% bonus from the government from a maximum amount of £3,000.
Lifetime ISA
Lifetime ISAs (LISA) are aimed at helping people save cash for either their first home or fore retirement. They have a tax year limit of £4,000 unlike other ISAs with a much higher limit.
Traditionally, there are two types of LISA:
- Cash LISAs – the more traditional savings options that allows you to simply put the cash in and let it sit there
- Stocks & Shares LISAs – this is a more risky account and allows the money you put into be invested in the stock market
A major drawback of LISAs right now is that firstly, you can only open one between the ages of 18 to 39 and the cash can only be withdrawn for the purpose of buying a first home or if you reach the age of 60 or over. Withdrawing the cash for any other reason will result in a severe 25% penalty on the amount withdrawn.
Junior ISA
Junior ISAs are chiefly focused on putting savings together for children. They allow savers to put up to £9,000 a year into the account (a separate allowance to any additional Cash ISA) each tax year.
All the money put into the account can only be withdrawn by the child when they reach the age of 18 while they can start taking control of the account itseld at 16. Similar to LISA, savers can either opt for a cash Junior ISA or a Stocks and Shares ISA.
Stocks & shares ISA
The key aim of a Stocks & Shares ISA is to allow the money put into the account to be used towards investing inf dunds, bonds, and company shares. These are the most risky types of ISAs available and savers should consider if they are comfortable putting money away with the usual risks that come with investing.
One of the key advantages of this ISA is that the money put into it is exempt from capital gains tax (CGT) which is a tax on profits which can only be paid from selling investments. Furthermore, they are exempt from tax on bond interest and tax on divident income, which could make it an attractive option if you were already planning on investing.
One major drawback though is that your savings will not be protected if it suffers any losses from investments with the worst case scenario being that you lose all money invested.
Innovative Finance ISA
An Innovative finance ISA will allow the company you take it with to use the money to lend to borrowers and businesses. In this case, you will receive interest for lending the money out with the provider taking a cut.
Interest from the money you put through the lending will not be taxed, however, you could be at risk of losing money if the money lent is not repaid. Furthermore, returns on withdrawals could take a wihle as you will likely need to wait for other investers to but out your loan.
Savings are also not automatically protected in an innovative finance ISA, although the provider itself may have some safeguards in place but this isn’t guaranteed.
