A recent news article published in the Money Edit says that Savings accounts vs ISAs: which will earn you the most money?
Looking to build a savings pot
If you are looking to build a savings pot, then working out precisely where to save your money is an important decision – here we put savings accounts and cash ISAs head-to-head.
Both have their own merits, and determining the sort of account you want to open can help you make the best selection for your long-term financial health.
So how do you choose between traditional savings accounts and ISAs? Here we run through the pros and cons of each to help you make a more informed choice.
Placing your cash within a traditional savings account has become more attractive from a taxation perspective in recent years.
That’s on account of the personal savings allowance, which was introduced back in 2016. The allowance means that most taxpayers can earn a certain amount in interest from their savings accounts before having to pay any tax on those returns. The thresholds for the savings allowance stand at £1,000 per year for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers don’t get a personal savings allowance.
With the interest rates on regular savings accounts having been so low in recent years, it’s been harder for savers to hit that limit, meaning that many savers have enjoyed tax-free returns from their savings.
Higher interest rates
In addition, the interest rates paid on regular savings accounts tend to be somewhat higher than those paid on ISAs. For example, at the time of writing, the highest rate on offer for a regular easy access account is 2.81%, compared with 2.25% on an easy access ISA. Similarly on a one-year fixed rate, you can get 4.5% from a regular savings deal, but only 3.9% from a one-year fixed rate ISA.
There generally aren’t limits on how much can be saved within a typical savings account, either. There will be a minimum amount that is needed to open the account, which might be as little as £1, but there will likely be no cap ‒ you can stick as much money as you like in there.
The big negative of saving with a regular savings account is the tax situation.
If you start earning above the personal savings allowance, then you will have to pay tax on the returns from the money you have set aside.
Regular savings deals
You don’t necessarily need a huge amount set aside in order to be in this position either, given the interest rates now being paid on regular savings deals. Analysis from AJ Bell earlier this month found that basic rate taxpayers will start paying tax on their savings returns once they have £42,500, while higher rate taxpayers will pay once they have £21,250, should they sign up the top easy access savings account.
Moving to a two-year fixed rate paying 4.5% would see those thresholds drop to £22,200 and £11,100 respectively.
Should base rate rise further in the months ahead, and interest rates on savings deals increase too, then it will mean that more savers will be forced to pay tax on the returns from their savings deals.
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Source: The Money Edit