Savers are rushing to put money into cash ISAs, amid rumours that Chancellor Rachel Reeves could cut their tax-free limits — or even axe them altogether.
Right now, everyone can stash £20,000 per tax year into either a cash ISA savings account, a stocks and shares investment ISA, or a combination of the two.
However, many fear that Reeves may cut the cash allowance in her October Budget, in a bid to encourage more of us to invest instead. And according to Martin Lewis, it could potentially drop as low as £4,000.
‘Savers should certainly maximise ISAs while the rules remain as they are,’ Jason Hollands, managing director at DIY investment group BestInvest tells Metro.
‘If you have cash sitting in a savings account, it would be wise to open an ISA early this tax year in case of a mid-year change at the next Budget.’
But if the worst comes to the worst and you can no longer shelter your savings in a cash ISA, there are a number of low-risk alternatives, well-suited to those who are nervous of the volatility of investments but still want to put money away and not pay tax on it.
Here are three other solutions to consider.
Non ISA accounts
While building up a pot of tax-free savings is an attractive concept, it’s worth remembering that many of us can save some of our money tax free, and the amount can be substantial.
Unless you’re an additional rate taxpayer – earning over £125,140 a year – you’ll benefit from a Personal Savings Allowance, which means you can earn a certain amount of interest on your tax savings without needing to hand any of it to the government.
Basic Rate taxpayers – earning under £50,270 a year – can earn £1000 in interest a year without paying tax, while higher rate taxpayers can earn £500. That means you can put some money into an ordinary savings account and benefit from the interest tax-free.
At present, the highest rate most savers can get on an instant access account is 5% with Revolut. At this level, a higher rate taxpayer could have £10,000 in savings without paying tax, making £500 a year, while a basic rate taxpayer could save £20,000.
That said, with interest rates set to come down in the coming year, you may do better to lock in high rates now so that you keep benefitting from today’s returns. Secure Trust Bank is currently offering a 4.56% savings account fixed for five years, while Cynergy offers 4.55% for three years.
Premium bonds
Premium bonds are a popular government-backed product, run by National Savings & Investment. Although these accounts don’t pay interest, anything you win through a monthly prize draw is tax-free.
It’s worth keeping in mind though, the rate you receive may not be as high as you would get from a traditional savings account.
Rachel Springall, money expert at money data service Moneyfactscompare, says that while one lucky person gets a million pounds in each draw, the average return is 3.8%, and ‘savers can find rates above 4% in the current market.’
However, the tax-free nature of the prizes and the possibility of a big win means it’s still an attractive choice for many — especially those who have already used up all their allowances.
Money market funds
If cash ISA rates are cut and you can only use stocks and shares ISAs, an alternative (yet safe) way to make tax-free income is to use so-called ‘money market funds’, which invest in the very safest of assets.
Hollands, at BestInvest, explains that these funds invest in debt that is of a very short-term nature and backed by governments and banks. These assets are, he says, often referred to as ‘near cash’ or ‘cash equivalent’ and ‘could become more relevant for individual savers if Cash ISAs become constrained.’
You can buy these funds in a stocks and shares ISA on DIY investment platforms such as Hargreaves Lansdown, BestInvest or A J Bell. But bear in mind, you pay fees and charges for holding and selling funds, which could eat into your return.
Two funds to consider are the Goldman Sachs Liquid Reserves fund, which is Hollands’ top pick, and the popular Royal London Short Term Money Market fund. The Goldman Sachs fund returned 5.1% last year, and the Royal London fund 5.3%, so they compare very favourably with cash savings.
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