TAXING TIMES
Urgent warning about ‘use it or lose it’ savings deadline in DAYS – are you missing out on tax-free cash?
Under current rules you can save into only one kind of cash ISA a year
TIME is ticking to make the most of tax-free savings allowances this year, as millions risk losing out.
The “use it or lose it” annual ISA allowance will refresh on April 6.
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And this year, new rules on the savings accounts take effect, including a rise in the minimum age for opening cash ISAs.
Here Harriet Cooke explains the changes and how to find the most lucrative home for your cash ahead of the deadline.
RULE CHANGE
THE main benefit of an ISA is that you can save up to £20,000 each year and the cash is completely protected from tax.
Under current rules you can save into only one kind of cash ISA a year.
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But from the start of the new tax year on April 6, savers can contribute to multiple ISAs of the same type in the same tax year.
Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, says: “Paying into multiple ISAs in a single tax year will mean savers can jump on better rates later in the tax year and no longer risk accidentally breaking the rules.”
The age you can open a cash ISA is also increasing, from 16 to 18 years old.
SHOULD I GET CASH ISA?
CASH ISAs are not the only way to stop HMRC from taking a slice of interest earned on savings.
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Under the personal allowance, most people can earn up to £1,000 of interest tax-free from any account.
Higher-rate taxpayers can earn up to £500 interest tax-free.
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To earn more than £1,000 in interest in a year you would need to have about £19,500 stashed away in an easy-access account paying at least 5.11 per cent in interest.
If you have more than this in savings, an ISA is essential to protect it from the taxman.
And rates on savings accounts have shot up recently, meaning more people are being drawn into paying tax on savings interest.
But if you don’t have enough savings to breach the personal allowance, weigh up your potential return from a cash ISA compared to a taxed savings account, which will typically pay more interest.
There’s a handy calculator at moneysavingexpert.com/savings/savings-calculator.
CASH ISA OR OTHER SAVINGS ACCOUNT?
IF there’s no risk of paying tax, look for the savings account with the highest returns.
The best easy-access ISA on the market is through the app-based account Plum, which pays 5.17 per cent.
The top easy access account is Ulster Bank’s Loyalty Saver, at 5.20 per cent.
These interest rates are variable meaning they can change with little notice.
But you can also get fixed-rate account ISAs that pay higher rates of interest, including Charter Savings Bank’s at 5.05 per cent.
This pays less than the top-paying one-year bond on the market, Secure Trust Bank at 5.25 per cent.
Top fixed-rate accounts sometimes require a hefty minimum deposit.
For example, Secure Trust Bank’s account asks for at least £1,000.
Usually you won’t be able to access cash without a penalty either.
James Blower, head of savings at Zopa Bank, said: “Unlike fixed-rate bonds, fixed-rate cash ISAs are generally accessible — although you may have to pay a hefty interest charge to access your money before the fixed term ends.”
OTHER TYPES OF ISA
OTHER types of ISA might help you with certain goals.
Lifetime ISAs allow people between 18 and 40 to save for a first home or retirement.
The scheme allows contributions of up to £4,000 each year, until you’re 50.
As with cash ISAs, you have until April 5 to use your limit for this year.
The main perk of a LISA is savers get a 25 per cent bonus on top of savings.
So if you save £1,000, you’ll have £1,250 and if you save the full £4,000, you’ll have £5,000.
You will also benefit from interest or growth on your savings.
There are stocks-and-shares ISAs, too, which can be used to hold investments and protect them from tax.
And the Innovative Finance ISA can be used to lend money to borrowers or companies for business projects for returns.
Your cash is at risk with any kind of investment but the rewards can be more substantial.
Hargreaves Lansdown found the average five-year return on a cash ISA was 5.21 per cent, while savings invested in global tracker rate investment in a stocks-and-shares ISA comes in at 83.3 per cent over the same time period.
A Junior ISA, or JISA, allows parents to save up to £9,000 a year for their child and the money cannot be withdrawn until they are 18.
‘JISA will be nice lump sum to start daughter off at 18’
NIKKI KNIGHT and husband Ollie have set up a junior Isa for their 11-year-old daughter Sophie.
Mum-of-two, Nikkie, 38, from Lydney, Gloucs, opened up the account when Sophie was born, to build a nest egg for the future.
She said: “It was my dad’s idea to set it up and I chose Tesco Bank’s cash ISA as it had the best rate at the time, which was three per cent. It’s now up to four per cent.
“I’ve got a standing order in place and we add more at Christmas and birthdays.
“It’s nice to get the statement every year and know that the interest is growing over time.
“It’s a little lump sum to start Sophie off, for a deposit on a flat, tuition fees or a car – something we wouldn’t be able to help her with otherwise.
“I also really like the fact the money is locked away and can’t be accessed until she’s 18.”
Nikki runs the blog , which follows the blood cancer diagnosis of the couple’s six-year-old son, Toby.
FIGURE OUT THOSE TAXING LETTERS
THE tax codes on your payslip may be a mystery, but they are key to making sure you aren’t left out of pocket or owing a packet to HMRC.
They can be found on your payslip, your P60 or by contacting the taxman, and can change at the start of each new tax year in April.
If you’re on the wrong code, you can claim back any overpaid tax for the last four financial years.
The numbers show how much income you can earn before paying tax.
The standard personal allowance of £12,570 is reflected as the tax code numbers 1257.
But your allowance may be smaller if you earn more than £100,000, or larger if you claim marriage allowance. Here are what the letters mean in England.
BR – Usually where people have a second job or pension. Income gets taxed at the basic rate of 20 per cent.
D0 – Anyone with multiple incomes above £50,270. This work or pension income is taxed at 40 per cent.
D1 – For those earning more than £125,140 across jobs and pensions. This income is taxed at 45 per cent.
K – You owe tax from a previous year or have taxable benefits and HMRC are taking what’s owed through your salary.
L – The most common, and you get the standard personal allowance.
M – Stands for “marriage”. You pay less tax because your spouse or civil partner has transferred ten per cent of their personal allowance to you.
N – Also marriage related but you’re making the transfer.
NT – Short for “No Tax” if you have a non-resident status or you are declaring the relevant income.
T – Other calculations work out your personal allowance, usually when you’re earning more than £100,000.
0T – Emergency tax code when your employers don’t have enough details on your circumstances and you won’t get the personal allowance.
M1 – An emergency tax code and your tax is based on that month rather than the full year.
W1 – Another emergency code when you are paid weekly.
If it’s wrong, talk to your employer to find out what has happened.
You can also contact HMRC on 0300 200 3300 or write to: Pay as You Earn and Self Assessment, HM Revenue & Customs, BX9 1AS.
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If you are on the wrong tax code and have been paying too much, HMRC will adjust and reimburse you.
If you haven’t paid enough, you’ll have to pay back the cash.
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