Be strategic with your savings and make your money work harder

At a glance

  • Cash ISAs are a simple way to save, allowing you to earn interest without paying tax on it.
  • The introduction of the Personal Savings Allowance has weakened the tax benefits of Cash ISAs, leaving some wondering how valuable they are.
  • An adviser can help you get the best out of the allowances available to you, so that you can meet your financial goals.

Individual Savings Accounts (ISAs) quickly became the UK’s savings option of choice after they were launched in 1999. The Cash ISA was especially popular, offering people a way to shelter their cash savings from Income Tax and Capital Gains Tax (CGT).

The annual ISA allowance has increased over the years to £20,000, and several different versions have been introduced (including the Lifetime and Junior ISAs). However, Cash ISAs have remained in favour, even after the 2016 introduction of the Personal Savings Allowance (PSA), which had been expected to significantly dim the appeal of cash ISAs.

What is your Personal Savings Allowance?

The PSA is a tax-free allowance that means savers can earn up to a certain amount of interest on their cash without being charged tax on that interest.

The allowance applies to a wide range of products, including bank, building society and credit union accounts; NS&I products; investments such as investment trusts, unit trusts, corporate and government bonds; and compensation payments for financial mis-selling, among other sources of savings. Importantly, the interest you earn on your Cash ISA doesn’t count towards your PSA.

How much money can you have in savings before paying tax?

Under the PSA, basic-rate taxpayers can earn interest of up to £1,000 this tax year without being charged tax on it. For higher-rate taxpayers, the allowance reduces to £500, while there’s no allowance for additional-rate taxpayers.

While Income Tax rates differ in Scotland, those thresholds only apply to non-savings and non-dividend income. In other words, the UK rates and thresholds apply to savings income for taxpayers in Scotland.

There are some instances where you might have to let HMRC know of any savings interest you’ve made above your allowance. Most people who are employed will pay tax on those savings automatically, as HMRC will change your tax code based on the amount you earned in the previous tax year. But if you pay tax through self-assessment, you’ll need to use your tax return to report any interest earned on savings.

What does it mean for Cash ISAs?

On the face of it, the introduction of the PSA might have triggered the end of Cash ISAs, or at least led to a significant decline in the number of people using them. With few people likely to earn cash interest above the PSA thresholds, especially in a low-interest-rate environment, the tax benefits of Cash ISAs are weakened.

Yet the Cash ISA habit is firmly ingrained. The most recent data shows that the number of people subscribing to Cash ISAs increased by 1.2 million in the 2019/20 tax year, with the amount of money held in them jumping by £4.8 billion.1

This was due partly to a rush of demand for Help to Buy ISAs – classified as a form of Cash ISA – before they closed to new customers in late 2019.

Where do Cash ISAs fit now?

The interest that most taxpayers would have to earn in order to need their ISA as well as their PSA for cash means Cash ISAs aren’t as essential as they used to be. They still fit into wider financial planning, however.

“It’s very important to have some easily accessible cash savings for an emergency or rainy-day fund,” says Tony Clark, Senior Propositions Manager at St. James’s Place.

The Cash ISA allowance is part of the wider ISA allowance. So, while you could use all of it for cash, the PSA means you no longer need to do so.

“If you’re looking to get the best out of your ISA allowance, making a medium or longer-term investment might be a better use of it, provided it’s appropriate to do so and you take advice,” says Tony.

Will interest rates go up in 2022?

The Bank of England raised interest rates three times in the first five months of 2022, from 0.25% at the beginning of the year to 1% in May.2

With further increases expected as policymakers seek to mitigate inflation, it might seem that the interest paid on cash could soon spike and potentially take some savers close to the PSA threshold.

But interest rates are unlikely to go high enough for that to happen, says Tony. “The increases are mainly to fight inflation and once that’s come down again, interest rates might well do so too. In order for cash ISAs to be tax-economical again, interest rates would have to go up much more than is currently anticipated.”

The uncertain outlook underlines the value of taking advice and making sure your money is working as hard as you want it to.

“An adviser will help you to get the best out of your allowances,” adds Tony. “The various tax allowances are often seen in isolation, but they can work effectively together, and the ISA and the PSA are a good example of that.”

The value of an ISA with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested.

An investment in Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA or a deposit with a bank or building society.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Please note that Cash and Lifetime ISAs are not available through St. James’s Place.


1 Commentary for Annual Savings Statistics: June 2021, HM Revenue & Customs, June 2021

2 Official Bank Rate History, Bank of England Database, accessed May 2022

Sovereign Wealth Limited is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the group’s wealth management products and services, more details of which are set out on the group’s website Sovereign Wealth is a limited company registered in England and Wales, Number 07115386. The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.