The United Kingdom is fast becoming a nation of savers, but why have ISAs emerged as a firm favourite among those seeking to build a nest egg for the future?
According to recently released figures, the number of UK residents opening cash ISAs has climbed 10% in the 2022-2023 tax year as savers opted to open Individual Savings Accounts as a means of overcoming the risks of high inflation rates at the time.
As many as 7.9 million new cash ISA accounts were opened over the 22-23 tax year, while a total of 12.5 million adult ISAs were subscribed to over the same period, representing a rise on the 11.8 million accounts opened in the 21-22 tax year.
Impressively, Gen-Z savers appear to be the nation’s most committed ISA users, adding an average of £410 every month to their savings accounts. With the national average closer to £300 per month saved, Gen-Z is saving an average of £100 more each month than those aged between 45 and 54.
With more UK residents than ever before embracing the savings boom, there are many advantages to getting an ISA, but are Individual Savings Accounts really the best choice for savers? Let’s take a deeper look at why ISAs have become such a popular investment strategy:
The Lure of the ISA
So, what makes Individual Savings Accounts so attractive to savers? The key advantage that ISAs have over other investment strategies is that they’re entirely tax-free. This means that you don’t need to pay tax on your interest for cash ISAs, or any gains made on stocks and shares ISAs.
You aren’t liable to pay any income tax, capital gains tax, or even tax on dividends from shares held in an ISA. With capital gains tax (CGT) now standing at 18% for basic rate taxpayers and 24% for higher rate taxpayers, you’re liable to pay tax on the gains you make for stocks and shares investments if your profit is above the £3,000 threshold.
For example, if you make £5,000 profit on stocks and shares and your annual salary is £40,000 before tax, you’ll be liable to pay £360 in capital gains tax. However, the same profit made in a stocks and shares ISA is exempt from CGT.
Whether you open a cash ISA or stocks and shares ISA, your annual allowance that can be paid into your accounts is £20,000 (which has been frozen to apply to every tax year until 2029-2030). Although this can be limiting for some investors, it means that more people have the freedom to open their ISAs without having significant liquidity or wealth to invest.
Flexibility is Key
Another reason why ISAs have become the UK’s favourite way to save money is the flexibility they afford investors.
The recent Bank of England interest rate hikes to combat historically high inflation rates saw the fixed AER rates offered by cash ISAs rise beyond 5% across a number of providers.
However, stocks and shares ISAs have also remained a popular option for investors seeking to make gains through stock market investments. For investors who don’t have the time or experience to build their own investment portfolios, stocks and shares ISAs are generally managed and adapted to the individual’s risk tolerance on their behalf.
This helps Individual Savings Accounts to deliver a level of flexibility that alternative investment strategies regularly fail to keep up with.
Weighing Up The Alternatives
Are there any investment strategies that UK investors are missing out on due to the surge in popularity of ISAs? The closest competitor to cash ISAs is a typical savings account, and with basic rate taxpayers free to earn the first £1,000 of savings interest tax-free outside an ISA (or £500 if you’re a high rate taxpayers), savings accounts can be a great way of building wealth on a smaller and more comfortable scale.
Another strategy for saving money is premium bonds. While you don’t receive standard interest payments on savings held in National Savings & Investment’s Premium Bonds, you do have the opportunity to win money in prize draws every month. With the NS&I paying out two £1 million jackpots, each month along with many other prizes, premium bonds could be a functional alternative depending on your risk levels.
As an alternative to stocks and shares ISAs, DIY investing has become more accessible than ever for investors thanks to the emergence of apps that can help you buy and sell stocks on your smartphone. For those looking for a little more hands-on investing experience, DIY investing can be a great way to build your portfolio based on your interests and market expertise.
The Best Tax-Free Ticket in Town
Although there are some alternative options that can appeal to savers, the tax-free advantages offered by Individual Savings Accounts are set to ensure that the investment strategy remains the UK’s favourite long into the future.
Having been left largely unscathed in the wake of the 2024 Budget, we’re free to continue saving up to £20,000 each year without having to pay tax on our interest or gains. The ISA is the saving strategy of choice for UK residents for a good reason.
