Don’t lose your ISA allowance

With latest figures showing inflation continuing to rise, savers need to do everything they can to seek out the best homes for their money. Yet millions are set to shun ISAs this tax year meaning they’re effectively throwing money down the drain. This is a big mistake, particularly in these hard-pressed times.

The Retail Prices Index, which is the measure of inflation that includes mortgage costs and that is most commonly linked to savings and investment products, jumped from 2.40% to 3.70% in January. This was the second month in a row that the increase in inflation was higher than expected. We therefore need to be earning higher returns on our savings to prevent rising prices from eroding the true value of our money.

A basic rate taxpayer needs an account paying at least 4.62% or more in order to earn a positive return after tax and inflation is taken into account, while someone in the top-rate band needs an account paying at least 6.17%.

The problem is, with the Bank of England base rate still at its historic low of 0.5%, such returns aren’t easy to achieve. 

Cash ISAs ease some of the pressure because, unlike standard savings accounts, the interest you earn isn’t taxed. However, despite the value of this tax-break research from found that 37% of people aren’t planning on using their ISA allowance before the tax year ends on 5 April.

Kevin Mountford,’s head of banking, said: “Taxpayers should always try and make use of their annual ISA allowance but, with inflation rising and savings rates so low, ISAs really are a no-brainer at the moment. Anyone who hasn’t yet used their allowance for the current tax year should definitely do so before it ends in April.”

What is an ISA and how much can I invest?

An ISA – short for individual savings account – is effectively an investment wrapper which shelters your money from tax.

One of the main reasons so many people fail to make use of their annual ISA allowance is because they don’t understand what ISAs are and how they work.

Every adult in the UK receives an annual ISA allowance – it is currently £7,200 for those under the age of 50, while anyone who will be 50 or over before 6 April, can invest £10,200.

You can invest the entire amount in a stocks and shares ISA or you can split your allowance and up to 50% (£3,600 for the under 50s, £5,100 for those aged 50 or over) can be held in a cash ISA.

Even if you are nervous about investing in equities, you should still look to take advantage of your cash ISA allowance because cash ISAs are effectively like any other cash savings account. The only difference being, you don’t pay tax on the interest you earn. This means basic rate taxpayers effectively earn 20% more than they would in a standard savings account, while those in the higher rate band receive a 40% boost to their returns.

For more information on ISAs read our article ‘New ISA rules explained’.


What are the best ISA rates?

Fixed rates

As with standard savings accounts, fixed rate cash ISAs are currently offering the highest returns. Leeds Building Society has a five-year Fixed Rate ISA (Issue 16), which is operated online or by post, paying 4.60%.

As well as being available for this year’s ISA allowance, you can also transfer money invested in previous tax years. So if you have savings sitting in a cash ISAs that are no longer paying a competitive rate, you can transfer them into the Leeds account without losing the tax break.

Most fixed rate accounts don’t allow withdrawals during the fixed term, but with this product you can withdraw up to 25% of the balance without penalty each year. If you want to take out more than that or close the account early, you’ll lose 180 days’ interest.

However, it’s advisable not to touch the money held in ISAs unless it’s absolutely necessary because you lose the tax-free status on it as soon as it is taken out of the ISA wrapper.

Alternatively, Birmingham Midshires has a five-year Fixed Rate ISA at 4.50%. This is a postal account and you’ll be charged a hefty penalty if you make a withdrawal during the fixed term. Transfers in are accepted though. Another option is Nationwide Building Society’s Five Year Fixed Rate ISA Bond at 4.59%. It is operated online and transfers in are accepted. Withdrawals aren’t allowed during the fixed term.

Some people will be reluctant to lock their money away for five years in case the rate becomes uncompetitive. If you’d prefer a shorter term, Marks & Spencer Money has the leading three-year deal: its three-year Fixed Rate Savings Issue 9 (Cash ISA) is paying 4.00%. You can transfer money invested in previous tax years into the account but withdrawals aren’t allowed during the fixed term. This product can be operated by phone or post.

Easy access accounts

If you would prefer an easy access account, you will have to accept a lower rate of interest but in return you’ll have much more flexibility around paying money in and taking it out of your account.

You can earn 2.75% with first direct’s cash e-ISA. This rate is actually fixed until 31 August 2011 so you have some reassurance that it won’t fall. However, it is easy access so you can make withdrawals at any time. Transfers in are also accepted.

If you have money invested in previous tax years you want to transfer into a new account as well investing this year’s ISA allowance, Santander’s Direct ISA Issue 6 also pays 2.75%, but only on balances of £9,000 or more. The rate is less attractive at 2.00% on balances below £9,000. It’s also worth noting that this account includes an introductory bonus and the rate will fall to 0.50% after the first 12 months, so you should look to move your money again at that point.

Other leading easy access ISAs include Standard Life Savings Direct Access ISA and Marks & Spencer Money’s Flexi Cash ISA which are both paying 2.65%. Barclays’ Golden ISA has a rate of 2.58%, while ING Direct, Intelligent Finance, and National Savings & Investments are all offering easy access ISAs paying 2.50%.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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