On its 25th anniversary, the Individual Savings Account (Isa) has truly come of age and is throwing a party no saver should miss.
Interest rates on cash Isas now beat regular savings accounts with market-leading offers, and the tax benefits of these accounts have never been greater.
Add to this a shake-up of the Isa rules which gives you more flexibility and you will find that it has never been easier to grow your wealth with an Isa.
After years of extremely low rates, Cash Isas had developed a reputation for being the poorer cousins of ordinary savings accounts, but they have come a long way in recent years.
Two years ago there was a gap of 0.6 percentage points between the best ordinary fixed rate savings account and an equivalent Isa.
Tax Free: Interest rates on cash Isas now beat regular savings accounts with market-leading offers, and the tax benefits of these accounts have never been greater.
Last year this gap had narrowed, but ordinary accounts were still 0.28 percentage points ahead of Isas.
But in recent months the difference is almost non-existent, at 0.05 percentage points on fixed rate transactions and in some cases the trusty Isa has outpaced similar High Street accounts.
The average interest rate on easy access Isas accounts was 3.37 per cent on Monday, beating the 3.16 per cent average on easy access accounts, according to data comparison group MoneyfactsCompare.
Savers can now capture a market-leading 5.11% share with Moneybox’s easy-to-access cash Isa.
That’s a bit more than you can earn on a standard savings account, where the best deal is a 5.1% account with Cynergy Bank.
But the main selling point that makes the Isa even more valuable is that, unlike other savings accounts, no matter how much money you put aside (subject to annual allowances), you don’t will never have to pay tax on your interest, protecting every penny. from the tax office.
In a world of higher rates, this matters much more. Around 2.73 million savers are expected to pay tax on interest earned on regular savings accounts this year, up from 800,000 just two years ago.
Basic rate taxpayers must pay tax on the interest they earn on their savings above £1,000 a year.
Higher rate taxpayers can earn just £500 in interest before they start paying tax, and additional rate taxpayers pay tax on their entire interest.
And the good news is that from April, a major change to Isa rules announced by Chancellor Jeremy Hunt in his autumn statement will mean savers will be able, for the first time, to shop around for the best offers without being penalized.
From the new tax year, savers will be able to hold as many Isas as they want without being hit with a tax penalty. Currently, investors can only open and pay money into one Isa of each type each year.
This means they can only save in one cash Isa or one stocks and shares Isa per tax year.
Under current rules, anyone who opens more than one type of Cash Isa may be charged tax on the interest earned and their second account will be closed. This means they risk missing out on unused tax benefits.
Tax shelter: About 2.73 million savers are expected to pay taxes on interest earned on regular savings accounts this year, up from 800,000 just two years ago.
From next month this will no longer be the case, meaning savers will be able to shop more freely and benefit from the best rates without losing their tax-free allowance.
These tax advantages are just as essential, if not more, for savers who invest in stocks.
Next month, the tax authorities will further tighten their grip on the profits made by investors.
From April 6, the annual dividend will be halved to £500. The reduction will reduce the amount you can earn in dividends without paying tax to just one-tenth of what it was in 2018.
It was cut from £5,000 to £2,000 in 2018, and halved to £1,000 in 2023. As a result, more than 1.1 million more people will find themselves paying tax on dividends, estimates the HMRC.
Similarly, the capital gains tax allowance will be reduced from £6,000 to just £3,000, less than a quarter of the £12,300 allowance investors received in 2022.
This means it makes more sense than ever to put your savings in a tax-free package.
Calculations by broker Interactive Investor show a higher earner could have saved up to £9,000 in capital gains tax since 1999 – when Isas was launched – if they had invested all of his allocation to the account each year, rather than if he had purchased stocks and shares in a taxable account.
However, tax savings will explode in the coming years as the government continues to reduce investor allocations.
A higher rate taxpayer who caps their allowance in April from the start of the new tax year could save £18,534 in capital gains tax over ten years if no withdrawals are made, assuming the deductions remain unchanged over the period.
Myron Jobson, of Interactive Investor, said: “Although few people have been lucky enough to be able to use the full annual allowance each tax year, many have benefited from significant tax savings when they sell their investments .
“The significant reduction in tax allowances means that those with smaller portfolios held outside of a tax wrapper face an increasing tax burden as their investments increase.”
A new UK Isa is currently in the works and it will give savers even more leeway to shelter their money from tax.
Earlier this month, Mr Hunt announced that a new UK Isa would soon be created to allow investors to inject an extra £5,000 into the stock market beyond the current allocation of £20,000 each year, at provided the money is placed in UK listed assets. .
The government has not yet confirmed exactly when the new Patriot Savings Account will be launched. But recent political attention to these accounts has given Isas a new boost that savers can no longer afford to ignore.
j.beard@dailymail.co.uk
Check out the best Cash Isa rates in our savings tables
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