As the cost of living in the UK continues to climb, the ability to have savings, and in a place that can help them grow, is becoming increasingly important. Thankfully, there are numerous products available to help but the options can be vast and overwhelming.
Cash ISAs
A common option, especially among taxpayers, is a cash ISA (individual savings account). The main attraction here is that it is a tax-free account. Cash ISAs allow UK residents over the age of 16 to save a maximum of £20,000 each tax year without having to pay tax on the interest generated. This makes them especially appealing to high taxpayers or those saving close to the annual £20,000 mark.
Most high street banks, such as Halifax, Nationwide and HSBC, offer cash ISAs. You can choose from ISAs with either limited or flexible withdrawals, those with fixed rates and others with a variable rate. As of January 2023, typical rates are around 4%.
Other types of ISAs
Cash ISAs aren’t the only ISAs available. You could consider stocks and shares ISAs, which also provide returns free of income tax. However, with these types of ISAs the value of your investment can go down as well as up, so are deemed to be riskier than the cash equivalent.
And lifetime ISAs, which replaced the Help to Buy ISAs, allow for longer-term savings that can be put towards a home or perhaps a retirement plan.
It’s important to note that should you have more than one ISA, you wouldn’t be able to deposit more than £20,000 across them all. An expert would be able to talk you through the nuances of each.
Savings accounts
Prior to 2016, the interest on savings accounts wasn’t tax free, which is why cash ISAs gained popularity but, with the introduction of the personal savings allowance, as long as you generate less than £1,000 (£500 for higher-rate taxpayers) in interest you don’t need to pay tax on it.
The majority of UK taxpayers won’t reach that limit and with savings accounts often having more favorable rates, they’re worth considering, especially for those who don’t pay tax at all. The rates on savings accounts (at the time of writing) can go as high as 7% and, unlike ISAs there is no cap on how much you can deposit within a tax year.
Types of savings accounts:
In terms of variety, there are:
- Easy access accounts that don’t charge a fee or need notice for withdrawals but come with a lower rate;
- Notice accounts that require at least a month of notice to access your money; and
- Fixed term accounts that have a high fixed rate but usually limit withdrawal to the end of the term which can be anywhere from six months to five years.
While the interest rate is an influencing factor when deciding on where you want to keep your savings – the higher interest the more you’ll save – you have to consider how much you plan to deposit and how often you’re likely to want to access that money.