Yes indeed and here is why..
Since the tax rules changed in 2016 to allow basic rate taxpayers to receive the first £1,000 of interest on savings tax free, there has been little incentive for most savers to use ISA.
Before this change in the tax rules, banks, building societies and other savings institutions, would compete in ISA season for our savings pots. In the run up to the tax year end (5th April) we would see them advertising their most competitive interest rates and trying to encourage us all to switch to them, but these days the cash ISA rates are often less than other non ISA savings accounts.
Given that the ISA wrapper protects the contents from tax, using it to protect cash savings was always a bit of a waste of ISAs magic powers anyway. The only tax that arises from cash, is income tax on the interest. Investments on the other hand suffer two taxes; dividend tax on the income they generate and capital gains tax on the capital growth. It has always been possible to achieve more tax efficiency using ISA wrappers to protect investments from tax than it was to use them to protect savings.
The other important point here is that over any 5 year period you would normally expect your investments to grow more than your savings. The more return that is wrapped in ISA the more tax saved, so this is another reason why ISA should be used to protect investment returns rather than cash savings.
We all need to have an emergency cash fund and not everyone has investments in addition to their savings, so it isn’t surprising that in these circumstances we have to use ISA to put a tax wrapper around our savings, but since 2016 there has been no interest rate incentive for doing so.
In summary you are better off using your ISA allowance to protect investments from tax rather than doing a cash ISA, but you should only consider investing if you have already accumulated an emergency fund of about 6 months’ worth of routine committed spending.
If you need help with financial planning, Women’s Wealth is here to be your BFF (Best Financial Friend).
#SavvySam
