The new tax year starts today, and while in the past the cheers were for the new ISA allocation, today it's time to pop open the champagne for a huge change that means for all but bigger savers an ISA now holds little point.
That's because the personal savings allowance (PSA) launches today, and it's a game-changer. Until now, in normal savings, for every £100 interest earned, £20 was automatically taken off as basic-rate tax, and higher-rate taxpayers would later lose another £20 during tax self-assessment. From today it's all change...
The 7 personal savings allowance need-to-knows
- All savings interest will be paid gross, ie, there'll be no tax taken off.
- This works for ALL interest - not just savings accounts, but bank accounts, credit unions & peer-to-peer savings. However share dividends aren't included.
- Basic 20% rate taxpayers can earn £1,000/yr interest tax-free.
- Higher 40% rate taxpayers can earn £500/yr interest tax-free.
- Top 45% rate taxpayers don't get a PSA, so all interest is taxable.
- Cash ISAs, premium bonds and other tax-free savings interest DON'T count towards the £1,000 (or £500) limit so you can get this interest too.
- If you earn interest over the limit, you pay tax at your income tax rate, but only on the amount over the limit.
To put this in context, in the top easy-access savings account which pays 1.3% you'd need to save a whopping £75,000 to generate £1,000 interest; this is why 95% of people now won't pay tax on savings.
For a full Q&A on how it works see personal savings allowance help. For what's a 20% taxpayer, see my when earning more pays less blog.
The NEW savings fountain - earn max interest
As for most people tax is no longer an issue with savings, where you should have your cash has changed. It's now usually simply a question of where you can earn the most interest. So first, CHECK YOUR SAVINGS TODAY, find what they earn... you'll be shocked, rates have plummeted.
Then follow my savings fountain below. The idea is you put money in each level, and if it's full, you overflow to the next. This way you max out every penny. ALL savings mentioned here have the full UK £75,000 savings safety protection unless stated.
Before you start
Repay costly debts and possibly mortgages. £1,000 on a typical credit card costs £190/yr interest, £1,000 in easy-access savings earns £13/yr, so clear the debt with the savings and you're £177/yr up. Some will think "I need savings in case of emergencies", yet that can be a mistake. See my should I repay my debt or save? guide for why.
With mortgages, look if your mortgage rate is higher than the rate earnable on savings and consider paying it off instead. See my should I overpay my mortgage or save? guide for full pros & cons and use the overpayment calc to work out the gain.
Level 1: Top tier
Help to Buy ISAs: FREE 25% added to first-time buyer savings. For anyone 16+ who's never owned a home and may want to, these are usually a no-brainer. This is because as well as interest you can use it towards a mortgage deposit and 25% is added on top, up to a maximum of a free £3,000. Full FAQs & best buys in Top 4% Help to Buy ISAs.
Level 2: Top for lump sums
Earn 5% now tax-free & easy access via bank accounts. Some accounts offer high in-credit savings rates to entice switchers - it's the only way to earn decent interest on decent amounts.
- Bigger savers earn 3%: Santander 123* pays 3% AER variable if you've £3,000 to £20,000 in it. It has a £5/mth fee, but for most that's easily covered by the up-to-3% cashback you get if you use it to pay your bills, eg, council tax, energy, broadband (min pay-in £500/mth).
Even without that, and including the fee, it's the top deal if you've £7,000+ saved. Couples can have 3 accounts between them covering £60k (one each & a joint). See my is Santander 123 worth it? blog. The interest is so good that for higher 40% rate taxpayers if you max one out you'll be over your PSA limit (so then ISAs below look good).
- Up to 5% for smaller savings: TSB Classic Plus* pays 5% on up to £2,000 and up to £5/mth cashback on contactless card spending, Nationwide FlexDirect* is 5% on a slightly bigger £2,500 but only for a year. Club Lloyds pays 4% on £4,000 to £5,000 (but you need to pay in £1,500/mth). Alternatively check out £100 bank switching bonuses.
- Can anyone get these accounts? You usually need to pass a credit check, meet monthly min pay-ins & set up two direct debits. Full info incl eligibility criteria in Best Bank Accounts.
- Can I open more than one? Yes, see the 5% Savings Loophole.
Level 3: Top for monthly saving
Earn up to 6% with regular savings accounts. These pay high interest but only on small amounts, generally for a short time. They're great for, er, saving regularly, but you can also trickle lump sums in there too.
- The top payers are 'bank linked'. So you need a specific current account to open them; luckily those accounts tend to be best buys. First Direct* gives £100 to switchers and is no.1 for customer service (you need to pay in £1,000/mth or there's a fee) and it has a linked regular saver letting you put up to £300 a month in at 6% AER fixed.
Other top payers include M&S Bank and HSBC, plus all the 'level 2' accounts above have linked regular savers too paying 4%+.
- Anyone can earn 3.05%. The top non-linked account is Leeds BS Regular Saver at 3.05% AER variable, if you pay in £50 to £250 every month. Full info in Top Regular Savings Accounts.
Level 4: Only for bigger savers
New £15,240 cash ISA allowance - 1.85% tax-free. A cash ISA is just a tax-free savings account and as it's the new tax year, you've a new £15,240 allowance. Crucially interest from this doesn't count towards the £1,000 (or £500) PSA limit - so it's good if you'll earn more.
Full help on who should & shouldn't get them in my Is it time to ditch cash ISAs? guide. Full best buys in Top Cash ISAs, briefly...
- Top Easy-Access ISAs: If you want to withdraw any time, Coventry BS is 1.4% AER variable for new money only. To also transfer in poorly-paying old ISAs, Yorkshire BS pays 1.35% AER variable but only allows 3 penalty-free withdrawals a year.
- Earn more in fixed ISAs. Here the rate is fixed. You're supposed to lock cash away, but unlike normal savings fixes, they have to allow you early access to your cash, but can charge you some interest. The Bank of Cyprus UK 1yr fix is 1.4%, 2yr is 1.7% and 3yr is 1.85%.
PS: There's a new Junior ISA or Child Trust Fund £4,080 allowance tax-free from today. Click the links for full help and info.
Level 5: If you can lock cash away
Earn up to 2.42% in fixed-rate savings. These pay more than normal savings, and the rate is certain, but you can't withdraw early. Full help and best buys in Top Fixed-Rate Savings, in brief...
- The top straightforward fixes: Top 1yr is Bank of Baroda’s 1.9% AER (min £500), State Bank of India is 2.2% for 2yrs and 2.35% for 3 (min £10k). Both are fully UK savings safety protected.
- Earn more (probably) in top sharia banking fix: Al Rayan Bank pays 2.17% over 18mths and 2.42% over 2yrs. I say "probably" as Islam bars interest, so it's an 'expected profit rate'. It's never not fully paid out, but by definition isn't certain. Not a bad bet though; anyone can open it, & it's UK savings safety protected.
- Earn more but not UK-protected: Fidor Bank pays 2.45% for 3yrs, but it's German-protected to a similar amount (up to €100,000), so in the unlikely event it went bust you need to consider that you are reliant on the German govt to bail you out.
Level 6: Top normal savings
Earn up to 1.45% easy access. The most flexible savings, allowing big amounts and withdrawals whenever you need. Rates are variable, so once you get 'em, keep an eye on 'em. Full best buys in Top Savings.
- Top straightforward deal: Coventry BS pays 1.3% (min £1) and allows unlimited penalty-free withdrawals. Yorkshire BS pays the same rate (min £100), but limits withdrawals to one day per year.
- Use the top cash ISA as the rate's higher: The top easy access ISA from Coventry BS pays 1.4%. So unless you need your ISA allowance for something else, use it as an easy access savings - even if you won't gain from the fact it's tax free, you will from the fact it pays more.
- Earn more but not UK-protected: RCI Bank at 1.45% easy access, with unlimited withdrawals, is topping many best-buy tables, but that's not the full story: it's French-protected to a similar amount (up to €100,000). So in the unlikely event it went bust you need to consider that you are reliant on the French govt to bail you out. Not necessarily a problem, but it is worth knowing before deciding.
This article first appeared in the weekly email on 06 April 2016. It was updated on 19 April 2016 to reflect changes to some of the products featured.