British savers have sheltered a huge £35 billion from the taxman in the 20 years since the Isa was launched, Money Mail can reveal today.
Individual Savings Accounts — or Isas — have been handing out tax-free rewards for two decades. They now help us to invest, buy our first homes and save for our retirement and our children’s futures.
Today, in our 20th anniversary special, we can reveal that banks and building societies have finally started to boost rates on their cash Isas in the run-up to the end of the tax year next month.
Happy birthday: Isas have been handing out tax-free rewards for two decades. They now help us to invest, buy our first homes and save for our retirement and our children’s futures
This is the first sign of life in a market that was dulled by tax changes brought in three years ago. It means savers can now earn as much with a tax-free Isa as an ordinary savings account.
This is a complete turnaround from recent years, during which banks and building societies have paid more to savers in taxable accounts than in their cash Isas.
Tom Adams, head of research at Savings Champion, says: ‘Cash Isas are coming back into their own. The gap has disappeared between the top easy-access taxable account and the best cash Isa rate.’
Back in 1999, the Isa started out as a simple tax-free savings scheme. When it was first unveiled, it was to come with a restrictive lifetime limit of £50,000 tax-free savings.
But, after Money Mail campaigned for the limit to be removed, Britons have since been able to hold on to billions that would have otherwise gone to Her Majesty’s Revenue and Customs (HMRC).
The Government sets a limit for how much money you can put into your Isa each tax year — from April 6 one year to April 5 the next. Any interest earned on this money is entirely tax-free.
However, if you do not use your Isa allowance in one tax year, you lose it. You can’t carry it over to the next.
Announcing Isas in the 1997 budget, then Labour Chancellor Gordon Brown, said: ‘Through the new Individual Savings Account, we intend to encourage the habit of saving among people who have never saved before.’
After their launch in 1999, Isas grew in popularity and became the first port of call to those looking for a savings account or to put money into the stock market.
By the time they’d been around for ten years, savers and investors were flocking to take them out — opening a huge 15 million in the 2009/2010 tax year.
There is currently more than £600 billion sitting in adult Isas.
In the 2017/2018 tax year, around £69 billion was saved into adult Isas — around £131,000 every minute.
Perk: The Government sets a limit for how much money you can put into your Isa each tax year Any interest earned on this money is entirely tax-free
Analysis for Money Mail by investment platform AJ Bell shows that HMRC has since surrendered £35 billion in tax receipts to the Isa over the past 20 years.
The Isa limit was £7,000 in 1999 and has since risen to £20,000.
So a saver who put away the maximum amount since the launch, and received an estimated 5 pc return every year, would now be sitting on a pot of £323,931, having invested £206,560.
Laura Suter, personal finance analyst at AJ Bell, says: ‘During these two decades, as a nation we have put away £874 billion in Isas, both in adult and Junior Isas and split between cash and investment accounts.
‘These people have saved around £35 billion in tax, sheltering their money from both income and capital gains tax. These tax savings will only get higher as more people start to take money out of their Isa accounts to help supplement their retirement income and as people put more money into the accounts each year now that the annual limit has vastly increased.’
There are more cash Isa deals on offer now than in any past Isa season, with 415 on the market this month, compared to 383 in March last year.
Rachel Springall, finance expert at Moneyfacts, says: ‘The latest Isa season shows great signs of improvement, with the choice of deals breaking the levels seen during the peak in 2018.
‘It is encouraging to see providers fully on board with the Isa season this year, with some launching market-leading rates to grab the attention of keen savers.’
Steve Webb, director of policy at Royal London, says: ‘For too many years, people with modest amounts of savings had tax deducted from the interest that they received. Yet the highest earners could often find ways of paying no tax at all on their savings and investments. ‘The introduction of Isas has meant that ordinary savers now have access to a relatively simple way of enjoying tax-free returns, which is especially important in an era of ultra-low interest rates.’
THE GREAT CASH COMEBACK
Cash Isas alone now hold £280 billion — handing out £2.5 billion in tax-free interest every year, based on the average rate paid out by banks and building societies at 0.9 per cent.
The top rate on both easy‑access taxable accounts and non-taxable cash Isas is 1.5 per cent, with big player Santander offering the cash Isa version. The last time cash Isa rates reached this level was in March 2016.
The gap between one-year fixed-rate accounts has also narrowed, though not yet disappeared.
The best one-year fixed-rate cash Isa, with Shawbrook Bank, now pays 1.77 per cent, while the top fixed-rate bond is Shawbrook’s at 1.97 per cent — a 0.2 percentage point difference. This time last year, the gap was double the size at 0.44 points, or 1.46 per cent and 1.9 per cent respectively.
Cash Isas lost their sparkle three years ago with the arrival of the personal savings allowance after years of rock-bottom interest rates.
The personal allowance lets a basic-rate taxpayer earn up to £1,000 a year in savings income tax-free. Higher-rate taxpayers can earn up to £500. So savers could earn higher rates and still pay no tax simply by opening an ordinary savings account, rather than a cash Isa.
In the year before the arrival of the personal savings allowance in 2016, 10.1 million savers rushed to open a cash Isa, putting in an average of £5,801.
In the last tax year, this tumbled to 7.8 million putting in an average of £5,114. Despite the fall, they remain by far the most popular Isa type — with their nearest rival, the stocks and shares Isa, clocking up 2.8 million accounts in the last tax year.
THIS IS MONEY’S FIVE OF THE BEST CASH ISA DEALS
Virgin Money pays a top rate of 1.45% interest on its Double Take e-Isa account. It only allows two withdrawals a year. Accounts can be opened with £1 and it allows transfers in
Charter Savings Bank pays a market leading 1.75% rate of interest on its one-year fixed rate cash Isa account. It requires a minimum deposit of £1,000 and allows transfers in from other providers.
Santander pays 1.5% interest on its easy access cash Isa account – the best rate available – which is exclusive to customers of the bank’s 1|2|3 World or Santander Select services. It requires a minimum deposit of £500 and can be managed online. The rate reverts to 0.30% after 12 months.
Coventry BS also pays a top rate of 1.50% on its easy access Isa, requiring a minimum deposit of just £1. The rate reverts to 1.15% once the offer period ends on 1 August 2020.
Leeds Building Society offers 1.75% monthly interest on its 19-month fixed rate cash Isa account. You can open the account with a £100 deposit.
Savers have until April 5, the end of the tax year, to use their £20,000 cash Isa allowance for this tax year and earn tax-free interest on their money.
On April 6, your cash Isa allowance will be renewed for another 12 months and you will then be able to save another £20,000.
With a rate of 1.5 per cent, you can have savings of £66,000 in a taxable account and earn £990 in interest tax-free as a basic-rate taxpayer. However, at 2.5 per cent, tax would start to bite once you have saved around £40,000.
With a cash Isa, on the other hand, you are protected if your savings grow or interest rates rise.
Experts say it is a good idea to use cash Isas even if you don’t bust your personal savings allowance. There is no guarantee the latter will last, as it could be cut in future years by any government.
Cash Isas, on the other hand, are more likely to remain untouched.
There is a tiny gap of around 0.05 percentage points among the very top payers with accounts on offer now, which translates into just £10 interest a year on the full £20,000.
However, while there is little difference in the rates, there are big variations in the terms and conditions behind them.
Some are boosted by an initial bonus, to make them look more attractive, while others restrict the number of times you can take money out of your account.
The top 1.5 per cent rate from Santander’s eIsa (only available to its 123 World or Select account holders) includes a bonus for the first 12 months.
Once it runs out, you must move your money or you will end up in a dead-end account: your money is moved into the bank’s Isa Saver easy-access account currently paying just 0.35 per cent on balances up to £10,000 and 0.6 per cent on larger sums.
Meanwhile, Yorkshire BS pays 1.46 per cent on its Single Access Saver Isa, but you are restricted to making withdrawals on a single day of the year (you can choose which day).
After a year, your money is moved into a lower-paying account. But we have not included it in the Cash Isas Star Buys table (above) because of its onerous terms.
Virgin Money’s Double Take E‑Isa at 1.45 per cent only allows you to take cash out of your account twice a year.
You can earn 1.45 per cent with Paragon or OakNorth Bank without any complicated terms and conditions.
Tax-free saving helped make me a millionaire . . .
Investment: David Charles
David Charles is now a millionaire, thanks to the Isa.
By using his tax-free savings allowance every year for the past 20, the 62-year-old from Berkshire has amassed a fortune of £1.1 million.
Since the Nineties, David, who is married to Frances, 60, has used tax-free accounts to invest £250,000 in the stock market.
For five years before the launch of the Isa, he used Personal Equity Plans (Peps), a government-backed tax-free account allowing investors to buy shares in UK companies.
When the stocks and shares Isa replaced Peps in 1999, it became a vital tool in shielding David’s savings from punitive taxes.
On top of his initial £250,000, he has now earned £290,000 in dividends and £560,000 from lucrative investments.
David, an experienced investment banker, uses his annual tax-free allowance every year to purchase shares through investment platform AJ Bell.
He used to pick the shares himself, but now he leaves it to fund managers.
As a higher-rate taxpayer, without the shelter of the Isa’s tax-free status he would be liable to pay 32.5 per cent tax on the dividend income he earns and 20 per cent tax on any capital gains, after his allowances were taken into account.
David quickly caught the bug after watching his father manage his own savings and investments.
He says: ‘It got me thinking about saving, investing, capital growth and dividends and the importance of setting aside money for the big purchases, such as a house deposit.’
It is a mindset he is keen to pass on to his children, Piers, 21, and Tara, 19.
He says: ‘My daughter and son are both students, so they don’t pay tax, but I have already started them off with their own Isas.
‘My advice to people who may not be taxpayers at the moment, but think they will be at some point in the future, is not to wait.
‘Make use of your tax-free allowance now, because you will never get it back.’