Money homeAsk Our Expert
Can an ISA protect my cash from the taxman? – Ask Our Expert
Hello,
I have a couple of questions regarding saving accounts.
I have recently inherited a modest sum of money (around £50,000) and wanted to put it away for at least one year in a savings account. My question is this:
Do I have to pay tax on the interest?
What is an ISA and how do they work? Are they tax free and how much can I deduct annually?
Thank you very much in advance.
Best regards,
Erik
Our money expert says…
If you are looking to invest for just one year and know that you will not need the cash for that year, the best option is a one-year savings bond.
Generally the longer the bond, the higher the interest rate, but for one year you should be able to find some good deals as high as 3.5%.
It is also worth noting that the Financial Services Compensation Scheme (FSCS) only covers savings up to £50,000 – or £100,000 for a joint account. This means if a bank or building society goes under then the first £50,000 of savings are protected.
If you are saving over £50,000, and are worried about a firm going under, then make sure cash over £50,000 is split between companies. However, be weary of firms that appear to be different companies, but are in the same group. It is worth noting, though, that through the heights of the financial crisis when UK savers found the Treasury stepped in to guarantee savings.
A list of firms and which groups they fall into can be found in our guide to protecting your savings.
ISAs
ISAs are great and should be the first stop for any saver for the simple fact the taxman does not take a slice of the interest, so you earn more.
However, ISAs will not solve your problem here as there are maximum amounts you can invest each year.
In the current tax year the maximum you can invest is £10,200 for the over 50s and £7,200 for the under 50s.
From April all savers will have an ISA allowance of £10,200.
However, only half of these limits can be saved in Cash ISAs (or £3,600 for under 50s and £5,100 for over 50s).
The rest, or, indeed, the whole allowance, must go towards a stocks and shares ISA. As is often said the value of investments in shares can go up as well as down, which can be not what you want if you just want to park the money for a year for a particular purpose.
For a fixed rate cash ISA for one year the very best rates are around 3% - but rates may start to climb in the next couple of months as ISA season starts – the period around the start of the tax year when banks and building societies increase rates to attract savers wishing to use up their allowances.
So the answer to the problem is that a cash ISA can shield you from some tax but not as much as you would like. Savings at National Savings & Investments do not pay tax, but it is worth shopping around for the best deal and keep the amount deducted for tax in mind.
See our guide to Cash ISAs