Table of Contents
Savers will be rushing to use their Isa allowance before the end of this tax year to avoid losing it.
For those looking to maximize the tax efficiency of their savings pot, a flexible Isa can be a useful tool in their arsenal.
With a flexible Isa you can take your money out and – importantly – put it back in without affecting your annual allowance – provided you pay it back in the same tax year.
Flexibility in an Isa is useful if you want to keep as much of your savings as possible tax-free. This is why.
Flexible friend: A flexible Isa can help to maximize the tax-friendliness of your Isa
What are the benefits of a flexible Isa?
A flexible Isa is most beneficial for people with large pots of money who can max out their Isa allowance of £20,000 per year.
They essentially give you the option to withdraw and redraw from your Isa without losing your annual allowance, something you can’t do with a non-flexible Isa.
James Blower, founder of the website Savings Guru, said: ‘For example, if you put £20,000 into a cash Isa and then take £5,000 out, in a non-flexible Isa you will lose that £5,000 from your pocket money.
‘With a flexible Isa you can put it back in and not lose your allowance. Taken to the extreme, a saver can deposit £20,000 on April 6, take it out on April 7, then deposit it again on April 5 the following year and keep the full £20,000 even if it’s only in the account. for two days of the tax year.’
However, there is a caveat. If you don’t replace the money withdrawn at the end of the tax year, you’ll lose the ability to send the balance back to your Isa without affecting your annual allowance.
Sarah Coles, head of personal finance at Hargreaves Lansdown said: ‘If you are using your full Isa allowance and want to top up regularly, you could benefit from a flexible Isa, which allows you to top up your Isa allowance until the full allowance is made later in the tax year.
‘This could also include those looking to put their emergency fund into cash, Isa. You need flexibility, because you don’t want to be hindered when it comes to recordings.’
How can they protect you from a savings tax raid?
Now that interest rates have risen so much over the past two years, many more savers will pay tax on the interest they earn on their savings, because they use up their Personal Savings Allowance with smaller deposits.
When interest rates were low this didn’t matter much as the personal savings allowance protected many from tax on their interest – although the £1,000 allowance is halved for higher rate taxpayers and eradicated for higher rate taxpayers.
But with the best easy-access savings accounts paying 5 per cent or more, a basic rate taxpayer of £20,000 would stand to lose interest in tax.
The best easy access account on the market currently pays 5.08 percent and is offered by Charter Savings Bank.
Someone putting £20,000 into this easy-access account would earn £1,040 in interest in a year, so even a basic rate taxpayer would exceed their £1,000 annual tax-free savings allowance with a £20,000 deposit, while a higher rate taxpayer would rate (someone earning £50,271 to £125,140 per year) would easily exceed their lower allowance of £500.
On £1,040 of annual interest, a higher-rate taxpayer gets the first £500 tax-free, but is taxed at 40 per cent on the remaining £540, meaning they end up with £824 after tax.
Even a basic rate taxpayer would end up paying £16 in tax on their savings with this account, leaving them with £1,024.
The savings tax has a dampening effect on the best easily accessible accounts. It changes the shiny interest rate on the Charter Savings Bank easy access account to 4.06 percent if you are a basic rate taxpayer, and 3.05 percent if you are a higher rate taxpayer.
Anna Bowes, co-founder of the website Savings Champion, said: ‘For those people, using their money Isa to earn as much interest as possible is probably a good option as the interest will be tax-free whatever the interest rate. quantity.’
What are the best flexible Isas on the market?
Many banks and building societies don’t offer flexible Isas – and some that do will have limits on the number of withdrawals you can make per year before your interest rate plummets.
To get the most out of a flexible Isa, you also want to be able to transfer old Isas into the pot. This means that the choice is further limited, because some Isa providers do not allow this either.
Anna Bowes said: Chip, an app-only provider, offers flexible, easy access. Isa pays 5.1 percent.’
‘For those who prefer not to use an app-only account, Principality Building Society’s online bonus Isa pays 5 per cent.’
While James Blower said: Zopa’s easy-access Isa is flexible and pays 5.08 per cent. Zopa’s Isa allows savers to open fixed Isa pots within the Isa – so savers can put £10,000 into an easy-to-access Isa, £5,000 into a one-year fixed Isa and a further £5,000 into a two-year fixed Isa.’
> Find the best Isa cash deals using our tables
How can they help you keep more of your savings tax-free?
Flexible Isas allow savers to withdraw some of the money in their Isa for short-term needs and place it back into the tax-free account within the same tax year, without the replacement counting towards your Isa benefit.
Anna Bowes says: ‘It means those who may need to rely on Isa savings can do so freely once they have fully used their allowance.
‘Before the introduction of the flexible Isa rules, if you had used up all your Isa balance and made a withdrawal from your Isa, you would not have been able to replace the money, losing the tax-free status of that money.’
Some links in this article may be affiliate links. If you click on it, we may earn a small commission. That helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow a commercial relationship to compromise our editorial independence.