Martin Lewis: Will you really gain from the new NISAs?
Martin Lewis, Money Saving Expert
The Chancellor pulled a rabbit out of his Budget back pocket today, which is probably why he's been sitting uncomfortably for so long. The shock news is that from 1 July, cash and shares Isas are to be merged into one new, much bigger £15,000 tax-free savings and investing pot.
"HOORAH!", cried the nation's savers, arguably some of the biggest losers from the downturn, because UK interest rates have been forced to scrape the barrel's bottom.
Yet dig below the headlines and you'll see what a clever move this is, as it's been done at surprisingly little cost, or in truth, immediate gain for most savers. First, here's how it works:
An Isa allows you to save or invest tax-free. For example, a basic rate taxpayer putting money in a normal savings account has 20% of the interest eaten by the taxman, 40% at the higher rate, 45% at the top rate. In an Isa you keep it all, and it remains tax-free, year after year. See my Full Isa guide for more info on how these work.
The current ISA limit is £11,520 a year of which up to £5,760 can be in cash ISAs – a savings account you don't pay tax on. Whatever you don't use for cash can be put into a shares ISA, so you could have the full £11,520 in that. If you haven't used this year's yet, you need to get your skates on, the cash ISA year ends on 5 April. See my Top Cash Isas and Transfer Your Cash Isas guides for the best buys.
On 6 April, the new Isa year starts. On that day, no matter what you've done with Isas before, you can put a new £11,880 into Isas (up to £5,940 in a cash Isa).
On 1 July it's all change as the NISA launches. Then the ISA limit increases to £15,000 and you can choose to use all of it for savings or investing. In other words you will be able to use all the £15,000 for savings, a massive increase from the planned £5,940. For those who open an ISA after 6 April but before NISAs start, you'll simply be able to add to it up to the £15,000 cap.
On paper this is a fantastic boost for savers – yet the slight smudge on the paper occurs when you factor in today's dire rates.
Just a year ago, we were already in the doldrums with the top-easy access cash ISA paying 2.5%, yet that's nothing compared to today's spitworthily low 1.65% top payer.
At these rates, if you had saved the full £5,760 allowance last year in an ISA, you'd get £144 interest – a tax gain of £29 over normal savings. At today's top ISA rate, even with £15,000 in it you'd earn just £248 – a tax gain of £50. It's an improvement certainly, but only of just £21 a year.
The real boon comes in a few years
Don't think this means I'm saying you shouldn't bother, though. Savers' real boon from the ISA increase will come in a few years' time.
Firstly, because you can put £15,000 in each year, it'll mean some will be able to quickly protect an enormous amount, building up a huge tax-free savings pot. The second gain is that once interest rates rise, the tax gain will be far bigger.
So I doff my hat to the Chancellor, it's a very canny move.
He appeased savers who were close to revolting due to dire interest rates, but at little real cost to the Exchequer – at least before the election.
Will you really gain from NISAs?
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