Is it time to ditch cash ISAs – now that all savings will be tax-free?

MSE_Eesha · 8 February 2016 at 7:38PM

This is the discussion to link on the back of Martin's blog. Please read the blog first, as this discussion follows it.

Read Martin's "Is it time to ditch cash ISAs – now that all savings will be tax-free?" Blog.

Please click 'post reply' to discuss below.

jonesMUFCforever · 9 February 2016 at 12:30AM

Not got my head round all the rules yet - as I understand it a basic rate taxpayer gets an allowance of £1000 per tax year so interest payments up to this amount will be tax free.
As the rules stand now interest on ISA is tax free so IMO should not count towards the £1000 allowance.
I can't find a definitive answer to confirm this or indeed to correct me if I am wrong.
Anybody know for sure?

jamesd · 9 February 2016 at 1:56AM

Don't ditch the ISA. With the new Flexible ISAs due to arrive in April you can instead put the money into an ISA, withdraw say 90k of ISA money on 7 April and pay it all back into the ISA on 5 April. So you can get the non-ISA rate for short term money but still have the whole ISA pot available for when an ISA offers the better rates.

MSE_Martin · 9 February 2016 at 1:50PM

jonesMUFCforever wrote: »

Not got my head round all the rules yet - as I understand it a basic rate taxpayer gets an allowance of £1000 per tax year so interest payments up to this amount will be tax free.
As the rules stand now interest on ISA is tax free so IMO should not count towards the £1000 allowance.
I can't find a definitive answer to confirm this or indeed to correct me if I am wrong.
Anybody know for sure?

It is in my blog - point one on ISAs - "ISA interest does not count towards the PSA"

jamesd · 9 February 2016 at 1:55PM

With respect to it being possible to transfer money from past years and Flexible ISAs please see The Individual Savings Account (Amendment) Regulations 2016, specifically these portions that specifically provide for past year ISA money:

"5DDB.−(1) The terms and conditions of an account (other than a junior ISA account)
(“flexible account”) may provide for an account investor to be able to replace (in whole or
part) a cash amount withdrawn by the account investor in any year by a replacement
subscription of a cash amount (“replacement subscription”) made in that year.
(2) Subject to regulation 4(1B)(a) and (b), a replacement subscription in respect of the
current year’s subscriptions may be made into any account of the account investor.
(3) A replacement subscription in respect of the previous years’ subscriptions may be
made only to the account from which the withdrawal of a cash amount it is replacing was
made.
(4) Any withdrawal of a cash amount in any year is to be deemed to be made first out of
the current year’s subscriptions.
(5) Any replacement subscription is to be deemed to be a replacement first of any
withdrawal of a cash amount made out of the previous years’ subscriptions."

Further information can be found both in those regulations and in ISA manager bulletin 68 and the draft guidance notes entries which it links to.

jamesd · 9 February 2016 at 1:58PM

Martin, thanks for replying here, while I was busy writing the references to support the description.

I think that this one and the ability to have more than one account with a single ISA manager as in the HTB and regular cash ISA account both merit additional explicit clarification and examples in the guidance notes and Bulletin so I'll probably suggest that to HMRC.

Would you be kind enough to confirm here that I am right, assuming I am, assuming that you go to HMRC or Treasury to obtain certainty that this is correct?

MSE_Martin · 9 February 2016 at 2:19PM

JamesD, thank you for sending me that very interesting - much appreciated, and I wasn't aware of that nuance.. We're going to speak to revenue to get clarification. Yet on that, reading it I think you're right in the narrow event that you have a continuing ISA in one place you can withdraw past as well as current years contributions.

Im not sure this really affects the logic of the piece though. Even if you are in that position, you'd need to game it and withdraw money at the year start then replace the day before ISA year ends, then withdraw again next day. Useful for the v financially savvy, but not mainstream. I will add it as an addendum though once HMRC confirms

PS I have deleted my original response so as not to add confusion while I await HMRC repluy

jamesd · 9 February 2016 at 3:51PM

You can also transfer but do have to redeposit to the same account, which can be reopened if it was closed. The rules for what happens to the allowance if you've withdrawn a partial subscription and transfer the rest can get a little fiddly, with only the unused allowance transferring and you unable to repay the part of the current year money that you withdrew from the original place until you transfer back.

Say:

1. Account at manager A with 100k of past year money, subscribe an additional 5k (and pretend the annual allowance if 15k).
2. Withdraw 55k from A, [STRIKE]5k is automatically current year, 50k past year.[/STRIKE] 15k is automatically current year, 40k past year.
3. Transfer 50k to account with manager B. I'll have to re-read the rules to be sure I get what happens to the current year allowance that remains... may edit later.

But this way you can do things like moving between accounts and withdrawing from them to take advantage of the best interest rate deals.

With the remove and replace rule you can do some interesting things with respect to interest saving/making, say involving credit card paying off then using 0% for purchases cards to replace the money in the ISA as you do your normal spending.

I think that the first key logic aspect is whether you're even going to use the whole annual ISA allowance at all. Many people just won't have the money to even use it once, so there's really no disadvantage for them to just pick the highest rate.

Of course what we don't know yet is which ISA providers will choose to offer the flexibility feature, since it is optional for them.

MSE_Martin · 9 February 2016 at 6:03PM

JamesD. Yes you are right, just had confirmation. However HMRC said this is at the discretion of the ISA manager - they dont have to allow past year flexibility, so we may well see some just not wanting to (a bit like accepting transfers in).

As your rightly say the rules are complex and we're still trying to confirm the partial withdrawl interaction with transfers rights. We're going to do more on this - thanks again.

jamesd · 10 February 2016 at 5:28AM

Thanks Martin. I've corrected a mistake in my own post about the way current year subscriptions are handled.

dgp1000 · 11 February 2016 at 9:22AM

If I've read this https://www.gov.uk/government/publications/personal-savings-allowance-factsheet/personal-savings-allowance right no tax is payable on savings interest until your taxable income is more than £17000. Given the annual personal tax allowance next year is £10800, doesn't this mean you will have to earn more than £27800 before any savings interest is taxed? So it will be possible to receive more than £1000 interest tax free Or am I wrong?

Is it time to ditch cash ISAs – now that all savings will be tax-free?

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