Are ISAs still worth it after the savings tax change?

We weigh up the pros and cons

isa  individual savings account ...The recent budget brought in one of the biggest changes to savings in decades, with the introduction of a new personal savings allowance.

Every basic-rate taxpayer can now earn £1,000 interest on all their savings without being taxed on it; the figure's £500 for higher-rate taxpayers.

However, this move raises questions for holders of cash ISAs. These savings allowances allow holders to put away up to £15,240 a year without paying tax on the interest. So, now that you can earn interest tax-free anyway, are ISAs still worth the bother?

£1,000 is, undeniably, an awful lot of interest - you'd need to save between £75,000 and £100,000 at today's low rates to earn that much. But money put into an ISA is interest-free forever, and it soon mounts up: if you're putting in the maximum £15,240 a year it would reach £76,200 in only five years.

In addition, if interest rates were to go up to pre-credit crunch levels of six or seven percent, it could take a lot less in savings to earn £1,000 in interest, and the cash ISA could prove the better deal.

"It's not just the savings market that may impact your situation; a change in personal circumstances could also have an effect. For example, a pay rise at work could change what tax bracket you're in, which in turn would impact your annual personal savings allowance," says Nationwide's head of savings, Tom Riley.

"This is because higher-rate taxpayers get a lower allowance, and those on the top-rate - 45% - don't get any allowance at all."

Another advantage of ISAs is that spouses can inherit their partner's ISA allowance upon death, which isn't the case with the new personal savings allowance.

And cash ISAs tend to have better rates than other savings accounts, and don't require you to lock your money away as many other accounts do.

Finally, it's worth remembering that this isn't an either/or situation. Money in a cash ISA isn't counted towards your personal savings allowance, meaning big savers can use the allowance for other things.

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