Most interest rates for savers are still at historically low levels and show no signs of improving in the short term. If you’re looking to get the best return on your investments, where should you be looking? Both cash ISAs and high-interest savings accounts offer benefits for regular savers, but which is the best option for you?
Save Tax-Free with a Cash ISA
Everybody is entitled to a tax-free savings allowance every financial year, which can be invested in a cash ISA account. Currently the allowance is limited to 5,640, but this will increase to 5,760 from 6th April. The main benefit of an ISA is that any interest you earn is not taxable. The balance on your account remains tax-free even after the current year, providing you don’t withdraw the money. If you’re looking to move your previous years’ allowance to take advantage of a better rate, then you need to ensure that you transfer the money correctly to maintain its tax-free status.
There is a wide choice of ISAs available, many of which provide you with easy access to your money. They are particularly beneficial for higher-rate tax payers, who would usually see their interest taxed at either 40 or 50%. However, even ISA accounts do not have particularly good rates at the moment so you need to consider carefully if this is the right choice for your situation. If you’re comparing a cash ISA account with a top high-interest account, then any interest that you earn could work out less even after you’ve taken the tax into account. If you only have a small amount to save then an ISA might not be as advantageous to you as it would be for a regular saver who uses up their annual allowance.
Take Advantage of Better Rates with a High-Interest Account There are still some savings accounts available which pay higher interest rates. However, you may need to shop around to find the best deal. If you find a particularly good deal it could provide you with a better return on your savings than investing in a cash ISA. However, you need to take into account how much you’ll earn after tax, as this is a true reflection of the gains you’ll make. You should also consider how your return would be affected if the rates should drop further. Many high-interest accounts have certain restrictions which could make them unsuitable for your situation. For example, some will limit the number of withdrawals or have a high minimum deposit. Before you open an account, make sure that you read through all the small print so that you’re aware of any penalties or charges you may be liable for. Some accounts offer introductory bonuses for new customers and your rate may actually decrease substantially after this initial period.
There is no simple solution as to whether an ISA or a high-interest savings account is the best option. It all depends on your own personal and financial situation, including how much you have to invest, whether you want access to your money and how much tax you pay. If you’re looking for the best current deals, then you can search for both ISAs and a price comparison website and compare different accounts.
Written by Andrew Griffiths, fininace writer with 10 years experience in Financial Services
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