Martin Lewis has issued a warning to thousands of savers who should “probably ditch” their ISA accounts.
The MoneySavingExpert founder explained how the current top paying easy-access savings account actually beats the best ISA rates.
App-only bank Chase is currently offering 1.5% interest on your savings, compared to the top rate easy-access cash ISA from Cynergy, which is paying 1.05%.
Martin has encouraged people to open up ISA savings accounts in the past as you can save up to £20,000 each tax year without paying tax on your cash.
But new Personal Savings Allowance (PSA) rules introduced in 2016 mean most savers will be able to save a huge amount of money anyway without paying tax.
Basic 20% rate taxpayers can earn up to £1,000 interest a year from any and all savings without paying any tax on it. After that, their interest is taxed at 20%.
Higher 40% rate taxpayers can earn up to £500 a year, while top 45% taxpayers don't get a PSA.
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If you opened up the top-paying Chase easy-access savings account, Martin explained how you’d have to save nearly £70,000 to generate £1,000 interest.
This means anyone saving less than £70,000 wouldn’t be subject to paying tax on their interest anyway - which is the selling point of cash ISAs.
Those who can afford to save more than £70,000 should still consider a cash ISA, said Martin.
“These days, the cash ISA's main boon is that interest from it doesn't count towards the PSA: it's still tax-free on top of that,” explained the MoneySavingExpert founder in a new blog post.
“That means for the few with savings (or earnings) big enough to break that limit, it's a winner, as they can protect more interest from tax.
“You get a £20,000 ISA allowance each tax year, and, crucially, money you put into an ISA stays tax-free year after year.
“Yet for MOST, there's no benefit of saving in a cash ISA – so you simply should focus on getting the highest interest rate.
“Over the last few years, cash ISAs have tended to have WORSE rates than normal savings across all categories.”
While cash ISAs might not be worth it for most, Martin explained how other ISA products could still benefit savers.
For example, there is the Lifetime ISA (LISA) for first-time buyers or those who are saving for their retirement.
You can put away £4,000 each year and the Government will give you a 25% bonus on top of the cash you save.
This means you can get £1,000 free each tax year - or £2,000 free if you’re in a couple and you both have a LISA account that you max out.
