The Fixer: Cash ISA conundrum

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Dear Fixer,
I have some savings that are sitting in an account paying a low rate of interest.

I would like to put them into a cash ISA, but I can't find an ISA offering a very good interest rate to move them into - in fact the rates on offer seem low compared to some other accounts.

Is it still worth using an ISA if the interest rate is lower than I can get elsewhere?

M Doyle, Oxford

Dear Ms Doyle,

If you are a UK taxpayer, you have to pay income tax on interest earned from your savings in line with your usual rate – and that means losing say 20% or 40% of your return.

However, cash ISAs allow you to earn interest tax free, which is why savings experts always advise you to max out your ISA allowance before putting money into a standard savings account.

The good news is also that, from later this year, you will be able to shelter a massive £15,000 from tax in an ISA every tax year – and keep all of that in cash if you want.

All that said, saving in an ISA is clearly only a sensible option if the returns are competitive.

So to find the best rate for you, compare the gross (before tax) interest rate offered on a cash Isa with the net (after 20% tax) rate you would receive from a standard savings account.

Bear in mind too that, if you're a higher rate taxpayer, the net interest you would earn on savings held in a standard account will be even lower than the net rate advertised, as you are liable to pay tax at 40%.

The Fixer

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