The new savings rule that could beat low ISA rates

Tax-free interest could mean the best place to put that money is set to change


The new savings rule that could beat low ISA rates

Three quarters of us in the UK have some form of savings, and a new rule on tax-free interest could mean the best place to put that money is set to change.

It's been a frustrating few years to be a saver. Interest rates on most savings accounts and ISAs have been hovering around 1.5% in that time, with many older accounts offering even less. Though a third (34%) still use an ISA for their savings, nearly half (46%) keep their money in their current accounts, according to new research from Nationwide.

How tax-free savings will change

An ISA has generally been one of your best options, particularly since you can earn interest on your savings and not pay tax on it. If you put your money elsewhere, it would automatically have 20% tax taken away before it even reached your account.

That all changes with the introduction of the 'personal savings allowance', which starts in April.

If you're earning less than £43,000 each year, you'll be able to earn £1,000 in interest on your savings and not pay any tax on it. That's a huge amount which most normal savers won't even get close to.

Earn more than £43,000? Well if you're in the 40% tax bracket, you can earn £500 in interest tax-free. Still a huge amount for most people.

This is on top of any interest from an ISA, no matter the kind of account.

Better interest rates in current accounts

The best easy-access interest rates right now will probably be in a current account.

The competition for customers among the banks means you can earn as much as 5% in interest, and sometimes even get additional bonuses too.

However, there are limits. You can generally only save a few thousand pounds in the higher paying accounts, though you can open more than one account with different banks.

You might even need to pay a monthly fee, have regular direct debits or ensure a minimum monthly payment into the account.

And, unlike ISAs and savings accounts, you'll be credit checked each time you open one.

Regular savers can earn even more

Depending who you bank with, some banks offer Regular Savings accounts with 5% or 6% interest. These are great if you put away up to £300 each month from your salary.

When an ISA could still be for you

If you like the look of the high rates available in a current account or regular saver account, it doesn't mean you shouldn't consider an ISA too. Here's when one could work for you.

You're saving for your first home

The new Help-to-Buy ISA is a great option for anyone looking to buy for the first time. As well as rates as high as 4% available, you will be able to get a 25% bonus on your savings towards your deposit.

You have a high level of savings

If you've been saving for a few years, or received a lump sum, you might find the current accounts only cover a small proportion of your nest egg. ISAs are probably still your best option for receiving interest on the rest.

If interest rates rise

Money you save in an ISA each year (up to the annual limit of £15,240 in 2015/16), stays as an ISA year after year. If interest rates were to rise to levels before the credit crunch, the £1,000 personal savings allowance would be hit much faster, but any interest earned in an ISA would remain tax-free, even above the allowance.

This article is provided by the Money Advice Service.

How to Find More Money to Save