With interest rates on savings rising, it is worth looking into the benefits of a cash ISA. The cash ISA had fallen out of favour in recent years as interest rates offered by banks has been very low.
The availability of the tax-free savings allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers has meant savings interest for many taxpayers had fallen within these tax-free limits; what was the point of a cash ISA?
With interest rates being offered at 4%+ more savers will exceed this tax-free threshold, so the cash ISA becomes an attractive tax saving tool.
A cash ISA is simply a savings account that pays interest free of income tax. The maximum annual amount that can be deposited within a cash ISA is £20,000 per annum.
As we approach the end of the tax year, it is a great time to organise your finances to take advantage of tax savings to be made.
By investing £20,000 in a cash ISA before 5 April 2023 and then investing a further £20,000 from 6 April 2023, it is possible to move £40,000 from a taxable environment to a tax free one.
With interest rates being offered at the 4% mark, this means that on capital of £40,000 interest of £1,600 is earned tax free.
You can see that over several years, it is possible to build up large ISA balances which are sheltered from income tax and do not need to be reported on your Self-Assessment tax return.
If you would like to know how you might benefit by using ISA’s, please talk to your personal tax manager or book an appointment with one of the Dafferns Wealth IFAs for a financial review.