Archive: MoneySavingExpert's Money Tips Email

Martin: This is your four-week ISA deadline warning

Your money's nicer in an ISA, and now it's use it or lose it time! Top cash ISAs pay 4.68%, beating normal savings, though long-term shares ISAs are likely the winner

The tax year, and thus the ISA year, ends on 5 April. Though it's best not to leave it to the last minute as some providers shut their (virtual) doors early. If you don't use this year's allowance, you lose it. The good news, though, is providers, as normal, are ramping up deals this time of year while the focus is on ISAs. So let me take you through...

- What is an ISA (and how does it work)?
- Cash ISAs vs shares ISAs
- The top cash ISAs - earn 4.68%
- Already got cash ISAs? Boost the interest
- Lifetime ISAs and junior ISAs
- Frequently asked ISA questions

Each tax year, every UK adult (aged 18+) gets a £20,000 ISA allowance to put money away tax-free in a top cash (savings) ISA, or a shares (investment) ISA. You can have all £20,000 in one, or split it across both types.

Understanding how ISAs work is a piece of cake... (I've been doing this analogy since 2001, and it's not stale yet - watch my why ISAs are a piece of cake video explainer) Picture a cake, let's say a chocolate cake for cash savings (though it could equally be a strawberry cake for shares). Normally it's just sitting there, so the tax collector can come and take a bite. But think of an ISA wrapper like a protective piece of clingfilm you can wrap around some of the cake. Once your cash is inside, nothing changes - the cash in savings is still cash in savings (so a cash ISA is just a savings account) and the shares are still shares (so a shares ISA is just an investment account). The only difference is... now the tax collector can't eat any. See our full ISA guide for a detailed Q&A.

The key need-to-knows...

• Use it or lose it. You can't carry over your ISA allowance, so 5 April is the last date you can fill this year's ISA. After that, it closes.
• You get a new ISA allowance on 6 April. To explain, if you haven't used your ISA this tax year, and have enough money, you could put £20,000 in now, and another £20,000 in on 6 April (using next tax year's allowance). Even if you don't have enough to use next year's, if it's right for you, get the money in now, in case you have more to put away next year.
• Once money's in an ISA it stays tax-free year after year. The limit is on how much new money you can put in within each tax year. There's no total limit on what you can have in ISAs. Some now have £100,000s in cash ISAs, having used many years' allowances, and there are some shares ISA millionaires!
• From Apr 2027, the plans are that the cash ISA limit drops to £12,000/yr for under-65s. The shares ISA will remain at £20,000. The Chancellor argues this is to 'encourage young people to invest'.

This question is usually a proxy for 'should I save or invest?' (though if you're doing both, I'll explain below how to decide which is best to use the ISA wrapper for.) As a nation, we underinvest - we're risk averse... 

If you're putting money away that you don't need to access for the long term, say over 5 years, then on the balance of probability, investing in a broad spread of investments will usually substantially outperform savings. So in that case, a shares ISA wins. 

To stay less risky - best for most general investors - use that to buy funds, not individual shares (where the risks & rewards are magnified), eg, tracker funds which track the performance of indices such as the FTSE 100 (the UK's biggest shares) or the S&P 500 (biggest US shares).

Cash ISAs are for storing money you may need to access in the shorter term - whether to build up an emergency fund, save for a house, or for a rainy day fund. Or, if you're older, when people tend to de-risk. Plus, let's be honest, some of you won't invest no matter what anyone says.

Watch audience shock when I show investment vs savings returns...

Of course, there is risk when it comes to investing. There are no guarantees. That's why it's best over a longer period (when short-term market fluctuations, like those we're seeing right now, can smooth out) and with a spread across diverse assets (which also smooths the risk), so...

Investing is best if you've cleared expensive debt, have an emergency savings fund and won't need access to the money for at least five years.

Of course, many people already invest via their pension, but it is also a good idea to have some general investments too, if your finances allow, and Shares ISAs are a strong option. With these you can choose an enormous range of UK and worldwide investments - shares, funds, gilts, bonds and more. After all, an ISA is just a wrapper - what you put in it dictates the returns.

What tax does each ISA protect you from? 

- CASH ISAs: Interest paid on savings is subject to Income Tax. Yet there are three big allowances which mean, even outside an ISA, most don't pay tax on savings interest. My how savings tax works video takes you through it, but briefly these are...

• The Personal Allowance: The £12,570/yr you can typically earn from any source (work, interest etc) before paying tax.
• The Starting Rate for Savings: This lets some lower earners have up to £18,570/yr of untaxed earnings & interest combined.
• The Personal Savings Allowance (PSA). Lets most earn some savings interest tax-free each year. It is £1,000/yr of interest for basic 20% taxpayers (£500/yr at the higher 40% rate, none at the additional 45% rate). So at top rates you'd could have up to £22,000 saved as a basic-rate taxpayer before you earn enough to pay tax on normal savings.

A cash ISA is over and above those. The interest inside cash ISAs is never taxed and crucially doesn't count towards any of these allowances (ie, it doesn't use up your PSA). 

PS: Premium Bonds are similar, but they're capped at £50,000 saved, rather than an annual allowance.

- SHARES ISAs: There are three taxes on investment returns, which a shares ISA protects you from...

• Capital Gains: This is a tax on profits (sell shares or a fund for more than you bought it, that's a profit). It's the tax year you sell that counts, so if you bought a £1,000 fund and sold it at £10,000 this year, that's a £9,000 gain. There's no allowance for how long you've held it, so if you bought the shares 20 years ago or a month ago, it's still a £9,000 taxable gain this tax year. 
  
  You do get a £3,000/yr tax-free Capital Gains allowance. Above that, relevant Capital Gains Tax is 18% at the basic rate (24% above that).
   
• Dividends: These are an income payment you receive, say from the profits paid each year by a firm whose shares you own. You currently get a £500 annual Dividend Allowance. Above that, you pay 8.75% as a basic rate taxpayer (10.75% from 6 Apr), 33.75% higher rate (35.75% from 6 Apr), and 39.35% top rate (not changing from 6 Apr).
  
  
• Interest: If you earn interest (say on money held in savings in a shares account), it is taxed just like savings interest (see above).

In a shares ISA, profits, dividends or interest earned are all tax-free, (though 0.5% Stamp Duty tax on some share purchases can still apply). Plus the returns in ISAs don't count towards your annual allowance either, you get them on top.

If I've savings & investments, which ISA should I use? 

First look at how likely you are to use up your other savings or investing allowances, and therefore on which you are more likely to pay tax if the money is outside an ISA. Yet if we assume you'd pay tax on both, I'd hedge towards using a shares ISA for two reasons...

i) With investing you're hoping for big growth.

ii) While savings interest is usually paid annually, with shares or funds Capital Gains is only triggered in the specific year you sell. So imagine you put £20,000 in a stocks & shares ISA, you were very lucky and that share went up 100 times in the next five years and it's now worth £2m. The Capital Gains Tax would be huge outside an ISA. Inside an ISA, you'd pay no tax at all. 

Of course, rises of that level are unlikely. But if you have got money in shares, the hope is for it to have growth that outperforms savings, therefore have gains that outperform, so the more tax you need to be protected from.

Where to find out more about investing?

MSE has always been primarily focused on savings, as that's our expertise (not because we're anti-investing). We're looking to try and expand our investment help content, but it'll take time. 

As well as our shares ISA guide, you can watch back my ITVx Investing for Beginners show from December (I'm aiming to do another one this summer when I go back to 1hr shows). 

There are also lots of useful websites such as Boring Money that can help, as well as some of the bigger shares-buying platforms and some good investing educationalists out there. Of course, if you've more substantial funds, you can go to an Independent financial advisor and get bespoke advice.

PS: See free £50 of shares when you invest £100 starter deal below.

A cash ISA is just a savings account you can put up to £20,000 in per tax year where the interest is NEVER taxed. Just like normal savings, they can be easy-access, notice or fixed accounts - the only difference is they're inside a tax wrapper.

Right now, due to it being ISA season, the top cash ISA rates are beating normal savings. So even if you wouldn't pay tax on interest, if you want easy-access, you may as well save in a cash ISA as the rates are higher.

PS: As I'll be working on my show Tue pm, and things change rapidly, the MSE team will kindly update the products for me before we send.

Update (17 March): The rates in the the table below have changed since last week. For the latest, see Top cash ISAs and Top normal savings.

Remember, if you pay tax on savings interest, as you've used up all your allowances, that's when cash ISAs fully come into their own. 

The top easy-access cash ISA rate is 4.68%, the top normal savings 4.5%. That looks close, but if you pay tax on savings, while the ISA still gives you 4.68%, the normal savings is equivalent to just 3.6% after basic rate tax (2.7% after higher rate, 2.48% after top rate).

The top cash ISA fixes have a special power. The big benefit of fixed savings is the rate is locked in, it can't move, so you know exactly what it'll pay. On pre-tax rate alone, normal savings win, though of course for those who'd pay tax on the interest, cash ISA fixes are far better.

Yet unlike normal fixes, cash ISA fixes can't lock your money away, so you can always access it, normally by closing the account, though you will need to pay an interest-rate penalty (eg, 90-180 days of interest for shorter fixes, 270-360 days for longer fixes). So if there's a chance you'll need to access the money during the term, cash ISA fixes offer a get-out-of-jail-free card.

Update (17 March): The rates in the the table below have changed since last week. For the latest, see Top fixed cash ISAs and Top fixed savings.

Many with old cash ISAs either had poor rates to begin with, or have seen the rate plummet after the first year or so. So check your rate. If it's worse than those above, ditch & switch! To do that, don't just withdraw the money, as then it's no longer within an ISA. Instead, transfer it to the top ISA transfer deals (see table above).

• To transfer to a higher-rate cash ISA... Open a new one. You can do this even if you don't want to add new money in (say you've already used your ISA allowance for this year) - the application form will ask you about transferring cash ISAs. You can transfer some or all of of your old cash ISAs over.
  
  This way it moves the money for you, usually within a few weeks. There's no deadline on this, your money is already in an ISA, so the tax-year end is irrelevant as you're not using any new allowance. If you already have an ISA you want to transfer it into, and it allows transfers (you'll need to check), just ask for a form to do it.
  
  As Ken emailed us last year: "Learning this week that I can switch my cash ISA to obtain a better rate of interest - every 1% point increase in interest is worth £17/mth extra for a £20k switch!!
  
  
• Got a fixed-rate cash ISA? Check if you can ditch, switch & gain. If your fixed rate is low compared to the best today, you still have an option. You can transfer it to a new provider and pay your current fixed ISA's interest-rate penalty for early withdrawal.
  
  Our fixed-rate cash ISA switch calculator works out if it's worth it for you. As Sharon emailed a while back: "Dear MSE Team, a few weeks ago I read about ditching a low fixed rate ISA in favour of a higher rate. I had one year left of a 1.7% fix which I transferred to a 1yr fix at 4.4%. Even after paying a hefty 180 days interest, I will still be £1,200 better off. Thanks Martin, you've made another person very happy."

Q. Will the cut in the cash ISA limit impact existing cash ISAs? No. Once money is in an ISA, it's in - you're good. It will only impact the amount you can put in in future, not what you have in there.

Q. Is the interest paid or dividends reinvested into an ISA part of your £20,000 cap? No. Any interest paid or dividends reinvested into your ISA stays within the ISA wrapper, but doesn't form part of your £20,000 limit. The limit is on what YOU put into the ISA each tax year. You didn't put the interest in, the savings provider did. So you're fine.

Q. If you can choose between receiving cash ISA interest monthly or annually, which is best? Monthly is best for those who want to spend the interest regularly. If not, there's no difference. I suspect you're asking me because the same account will list different rates, eg, one 1yr fix pays 4.15% annually or 4.07% monthly. 

This is a technical, not a real, difference. The annual rate includes compound interest. The monthly rate has to assume you withdraw the interest each month, so you don't get interest on the interest. If you don't withdraw it, it would compound and you'd have the same amount.

Q. Is it worth opening a cash ISA even if you aren't going to use your full allowance of £20,000? It's just a savings account you don't pay tax on. So if the rate is higher than normal savings, even if you won't pay tax on interest, then put what you have in there. Another reason is in case you come into more money in future, you've got more room to protect that too.

Q. Can I have multiple different cash ISAs in the same tax year? Yes. You can now open more than one in the current year too (eg, a fix and an easy-access), just as long as you're not putting in more than £20k in total.

Q. Is it worth combining all my old cash ISAs into one place? Yes - then they can all be with the top payer. Plus it makes it far easier administratively, as then they're all in one place, and if the rate drops in future, it's simpler to transfer in one go. There are two main exceptions...

- If you wanted different types on the go (say, easy-access and a fix).
- If the total is over the £120,000 savings safety limit, in which case you may want to spread it across a couple of providers.

Q. How do I combine my fixed-rate cash ISAs if they all mature on different dates? If that's your aim, for an easy life when the first fix matures, transfer it to a top-rate easy-access cash ISA, then keep transferring the others into the same one when they mature. Once they've all matured, you could transfer all into a fix.

Of course, the time taken means there's a risk you might miss the best fix rates, but the current easy-access rates pay slightly more than fixes anyway, so hopefully it will work out well for you. You can't do it directly to a fixed cash ISA because you have to fund them within the first 30 to 90 days.