Are savers making the most of their tax-free ISA allowance?
Different types of ISA come with their own benefits and uses, but they all offer significant tax benefits compared to standard savings accounts. Find out why savers should be making the most of ISA season this year.
As the end of the tax year looms, we enter a key period in the savings calendar; ISA season. For those unfamiliar with the term, it refers to the period between March and April when savers are encouraged to use their tax-free Individual Savings Account (ISA) allowance before the tax year ends, and a new tax year gets underway.
It’s been a long time since interest rates were this competitive, so you’d be forgiven for forgetting this perennial event. This year ISA season is a bigger deal than usual though, as the effect of 2022’s higher interest rates could mean that savers with cash in non-ISA accounts are at risk of having to pay tax on their savings interest, where it's more than their personal savings allowance .
For every £100 of interest earned over the personal savings allowance, a basic rate taxpayer pays £20 in tax, while for a higher rate tax payer it’s £40. So it’s crucial that savers understand what ISAs are, how they work alongside personal savings allowances, and how to take advantage of them.
What’s different about ISA season this year?
The current interest rates on savings accounts are the highest they’ve been since 2016. Although people are getting a better return on savings, the cost of living has increased and we have a role to educate consumers about the ways they can make the most of their savings and personal savings allowance. But people shouldn’t just think about the year ahead: the allowances ISAs provide means people can grow returns on their savings cumulatively too, helping them make more of their money in the long term.
"What all ISAs have in common – and what makes them different to a standard savings account – is the tax-free wrapper they offer."
What do savers need to know about ISAs?
There are a few different types of ISA that come with their own benefits and uses, but what they all have in common – and what makes them different to a standard savings account – is the tax-free wrapper they offer to any earned interest.
The overall ISA allowance is £20,000 per tax year. So if you pay up to £20,000 into your ISA before 5 April, that amount can continue to grow until it’s withdrawn and you won’t have to pay any tax on the interest that’s earned. When the new tax year starts on 6 April, the contribution limit will reset and a further £20,000 can be added. The total annual limit of £20,000 applies irrespective of how many different accounts are held.
In a standard savings account, payees will have to pay tax on any interest that goes over their personal savings allowance. A saver’s tax band will impact their personal saving allowance as follows:
- Basic rate taxpayer (20%) – £1,000
- Higher rate taxpayer (40%) – £500
- Additional rate taxpayer (45%) – £0
With ISAs, this isn’t the case. As long as the saver doesn’t pay in more than their £20,000 annual allowance, any interest that they earn will be protected. However, it’s worth noting while you can pay in to multiple ISAs, you cannot open more than one of each type of ISA in a year.
What are the different types of ISA, and what are they for?
Some ISAs are intended for a specific purpose like the Lifetime ISA (LISA). ISAs can offer different levels of availability or risk, as well as have different annual savings limits.
Cash ISAs – cash assets tend to be a low risk saving option. Different cash ISAs will have different access rules, and this might impact the interest people will receive. For example, fixed rate ISAs may mean that money needs to be in the account for a certain period of time and not withdrawn during that time – but in return they pay a higher rate of interest.
Stocks and shares ISAs – these come with a higher level of risk than cash ISAs, and people who use these should make sure they’re aware of any fees charged by the investment platform that they’re using. These could include management fees (the cost a provider charges for managing the stocks and shares in the ISA) and transfer fees (some providers may charge you for moving money to a new account or platform). While it can take longer for people to see returns on their investment, there is potential for greater returns than cash savings ISAs – but investments can always go down as well as up. Most providers, including Lloyds Bank which recently launched Ready Made Investments, offer Stocks and Shares ISAs with funds offering varying degrees of risk, meaning people can align to what they feel comfortable with.
But one of the main advantages of saving into a stocks and shares ISA (as opposed to a normal stocks and shares account) is that savers are exempt from tax on capital gains (tax paid on any profits made from an asset), dividend income (a sum paid to shareholders from company profits) and bond interest. While these might not be things to worry about at the start of a savings journey, they would be things to consider over the longer term.
Lifetime ISA – LISAs were launched in 2017 to help people save for a house or to help them in retirement. They can only be opened by savers aged 18-39, and they have an annual savings limit of £4,000. The big advantage of a LISA is that the Government will top up the account by 25% per year. , But savers can only withdraw the funds if they’re buying their first home, or they are 60 or over. Otherwise there will be an exit charge of 25%, essentially wiping out those Government top-ups.
Junior ISAs – these ISAs are specifically for children and come with an annual savings limit of £9,000 – but, they are exempt from the individual £20,000 savings limit, meaning that a saver could max out their annual allowance and still save into the junior account for their child on top of this. These accounts can be divided between cash and stocks and shares options, but the cash can’t be accessed until the child turns 18.
What are we doing to help our customers this year?
We offer several ISA accounts across our Lloyds Bank, Halifax and Bank of Scotland brands so our customers can make the most of their tax-free savings.
- We have a wider range of flexible ISAs, some with limited withdrawals to give customers a choice of ISA which best suits their needs.
- Customers can transfer from other providers to us to benefit from the rising interest rates.
- Customers can find out more information on our websites where we have savings calculators, savings tips and a host of useful tools to support savers at all different stages.
- We also have colleagues in all our branches and over the phone who can support.
We’re always reviewing our products and engage our customers about their available options so savers can get the most from their money. Recent improvements we’ve made include:
- Increasing the interest rate of a number of our fixed rate ISA products.
- Halifax ISA Saver Fixed 2 Year – 4.00%.
- Lloyds Bank and Bank of Scotland Fixed Rate Cash ISAs 2 Year – 3.90%.
- Giving our colleagues regular information and updates so that they can support our customers.
- Targeted direct mailing to customers, letting them know about the products we have and what they need to do to start saving.
Top tips for ISA season:
- Savers should use their tax-free allowance! Savers still have time to maximise their 2022/23 allowance up until 5 April , and also start thinking about what they want to do with their savings for the 2023/24 tax year.
- Savers should take time to review their existing savings accounts and look at the range of products – from variable to fixed and even monthly savings options available.
- No matter how small or large, any amount saved will make a difference.
Andy Bickers, Savings Director
I have two different jobs – one is leading a team of 80 colleagues who manage the savings of our 30 million Retail customers across all our different brands, the other is as sponsor of our Everyday Banking Platform.
It may sound a bit corny, but playing my part in helping people grow their wealth to achieve their dreams in life is the reason I went into banking, plus the opportunity to work with and learn from a lot of smart people.
What's next for Lloyds Banking Group in 2023?
22 February 2023 | Charlie Nunn
Charlie Nunn, Group Chief Executive, reflects on the 12 months since launching our new strategy and what’s to come in 2023.
Why it’s vital savers track their missing pension pots during the cost of living crisis
Robert Cochran | 15 Nov 2022
Today nearly half (46%) of UK pension holders have lost track of some of their pension pots, according to new research from Scottish Widows.
Keeping our homes safe and warm
David Cleary | 13 Dec 2022
As the cost of living continues to rise, it's vital that social housing is well maintained to help support people and families across the UK.
More news and insight
Popular topics you might be interested in
Sustainability Diversity Supporting business Housing Pensions Investment
ESG Digital technology Our people Group news