PSA easily used up with higher % accounts - ISAs to get useful again?

someone

I've been thinking about a higher inflation and a possible higher interest rate environment.

ISAs fell out of favour as most savers had been covered by the Personal Savings Allowance (PSA). If the PSA stays at £1,000 for Basic Rate and £500 for Higher Rate taxpayers then many savers are going to quickly start needing to use tax efficient products such as ISAs.

Already with Chase Bank offing 1.5% a Higher Rate tax payer only needs savings of £33,333.33 to have exhausted their PSA and start paying tax on their savings!

We know the current chancellor is fond of "stealth tax rises" in which thresholds and allowances don't move, they just stay static (CityAM: Rishi Sunak has shown his true colours by hiding stealth tax rises in the detail). Covid recovery and "paying back the support" will also act as a pressure to keep thresholds and allowances from been uprated.

Depending where rates end up, the sudden increase in people who need to declare they are over the PSA etc might spell the end of the the PSA. It would be easier to combine the general Personal Allowance (how much you earn from any source before income tax is paid) and revert to the old system of banks paying NET by default. You can see it been sold as handing everyone £200, and for basic rate taxpayers with little/no savings it would be.

I charted the point the PSA is exhausted at different interest rates for both Basic Rate and Higher Rate taxpayers to show other readers how interest rates might push them into saving income taxpayers.

masonic

Premium bonds are still looking a good easy access option for higher rate taxpayers after they have exhausted their PSA. Fixed term cash ISAs have been useful for some people for some time. As always, it's good to weigh up all options using the net figure you'd receive.

I don't really understand your point about removing PSA, unless you mean add it on to PA. One aspect of introducing PSA was to reduce the administrative burden of deducting tax at source. The likely value to the treasury of scrapping PSA is probably not going to be very significant when compared to other low hanging fruit. It's a minority of adults who have more than a few thousand in savings accounts, and a tiny number who have so much they couldn't get it into an ISA quickly if needed. ISA allowance would need to be slashed at the same time.

It's worth also noting that a high inflation environment is not good for holding large amounts of cash savings to be kept long term.

jimjames

someone said:

I've been thinking about a higher inflation and a possible higher interest rate environment.

ISAs fell out of favour as most savers had been covered by the Personal Savings Allowance (PSA). I

ISAs have never been out of favour, only cash ISAs. S&S ISAs are still a great option. It remains the case that holding large amounts of cash long term isn't a good move even more so when inflation is going so high. Anything that encourages holding too much cash isn't a great idea in my view.

Dazed_and_C0nfused

someone said:

I've been thinking about a higher inflation and a possible higher interest rate environment.

ISAs fell out of favour as most savers had been covered by the Personal Savings Allowance (PSA). If the PSA stays at £1,000 for Basic Rate and £500 for Higher Rate taxpayers then many savers are going to quickly start needing to use tax efficient products such as ISAs.

Already with Chase Bank offing 1.5% a Higher Rate tax payer only needs savings of £33,333.33 to have exhausted their PSA and start paying tax on their savings!

We know the current chancellor is fond of "stealth tax rises" in which thresholds and allowances don't move, they just stay static (CityAM: Rishi Sunak has shown his true colours by hiding stealth tax rises in the detail). Covid recovery and "paying back the support" will also act as a pressure to keep thresholds and allowances from been uprated.

Depending where rates end up, the sudden increase in people who need to declare they are over the PSA etc might spell the end of the the PSA. It would be easier to combine the general Personal Allowance (how much you earn from any source before income tax is paid) and revert to the old system of banks paying NET by default. You can see it been sold as handing everyone £200, and for basic rate taxpayers with little/no savings it would be.

I charted the point the PSA is exhausted at different interest rates for both Basic Rate and Higher Rate taxpayers to show other readers how interest rates might push them into saving income taxpayers.

Interesting but don't forget there are plenty of people who don't even get to the point of being able to use the savings nil rate band (aka PSA) as they have the Personal Allowance and/or savings starter rate band to use first.

Thrugelmir

As long as inflation remains above the rate of interest available on savings accounts. Holding ISA's will only be of marginal benefit. Tax is a neccessary evil to reduce the level of Government borrowing. As higher interest rates ultimately will impact us all. 

Malthusian

Cash ISAs were largely pointless even before the introduction of the PSA, as the interest rate offered was generally lower than that on taxable accounts. They were mainly useful as a yearly FOMO marketing ploy ("ISA season") and because they could be transferred into stocks and shares ISAs later.

That interest differential has survived the overhaul which means cash ISAs now typically pay less than a taxable account net of tax (nil for most taxpayers).

Let's say I am a higher rate taxpayer with £100,000 in the bank earning 1.5%pa interest. Each year I pay £200 in tax on the interest. I also pay £2,500 every year in inflation costs for the privilege of having my money stay the same number. (That is of course based on the Bank of England's target rather than current rates.) Tax on interest is just not a big deal. If it is you should probably ask youself just how much cash you need.

someone

With Virgin's Easy Access Cash ISA Exclusive Issue 2 bumped up to 3% I thought about this thread again.

• 7 months later headlines rates have doubled.
• Assuming non-isa's will catch up to this rate at instant access the break even point (amount of savings before tax paid) is £33,333.33 for basic rate and £16,666.67 higher rate taxpayers.
• Those values on the right hand side of the chart now seem even more likely ... possibly before the end of the tax year.
• Martin Lewis has started to raise awareness of ISAs are a "it depends" situation
       On his show
       On the main site as per the chart below (interesting but only presents what has happened, kinda like a "rear view mirror", forward planning needs a chart like in the one in the original post here)
• We continue to see news about "stealth tax rises" (thresholds been frozen pushing more people into paying more tax without having to rase the headline tax rates).
• One bonus: the banks "ISA Tax" seems to have started to be eroded. Headline ISA rates are the best savings rates in some cases (guess marketing) and the spread between regular and ISA rates is reducing (the extra overhead of running ISA accounts I guess is a fixed cost so in higher rate environments there is less need for a large disparity to recoup running costs).

Looking to the future: On the marketing side of the fence, the structure of ISAs can limit amount spent on loss leaders: provider can bar transfers in and can limit to one tax year meaning they only pay out on £20k (much larger than the old limits of £3k but still a limit).

https://twitter.com/MartinSLewis/status/1588123855947563008

badger09

I was going to type something along these lines on another thread speculating about abolition of the PSA. Instead, I'll link to this one, crediting OP of course 

Band7

someone said:

 

Looking to the future........

The next checkpoint is November 17 when everything could change. Who knows whether we will still have £20k annual allowance after that date, or after the current tax year.

Dazed_and_C0nfused

Malthusian said:

Cash ISAs were largely pointless even before the introduction of the PSA, as the interest rate offered was generally lower than that on taxable accounts. They were mainly useful as a yearly FOMO marketing ploy ("ISA season") and because they could be transferred into stocks and shares ISAs later.

That interest differential has survived the overhaul which means cash ISAs now typically pay less than a taxable account net of tax (nil for most taxpayers).

Let's say I am a higher rate taxpayer with £100,000 in the bank earning 1.5%pa interest. Each year I pay £200 in tax on the interest. I also pay £2,500 every year in inflation costs for the privilege of having my money stay the same number. (That is of course based on the Bank of England's target rather than current rates.) Tax on interest is just not a big deal. If it is you should probably ask youself just how much cash you need.

Wouldn't you be paying a minimum of £400?

Or sometimes more when HICBC or tapered Personal Allowance are a factor?