Saving or investing in an ISA (Individual Savings Account) in the UK can affect how much tax you need to pay on your savings. So, are ISAs worth it in 2023? Well, the answer is not as straightforward as you may think.
Are ISAS worth it in 2023: Summary Table
|🙋 What does ISA stand for?||Individual Savings Account|
|#️⃣ What types of ISAs are available?||Cash ISA, Stocks and shares ISA, Innovative Finance ISA, Junior ISA, & Lifetime ISA|
|❓ What are the current ISA allowances in 2023?||£20,000|
|🧐 Should I invest in an ISA in 2023?||It depends on your individual circumstance and financial goals|
Investing in an ISA can be a good savings option for people who want to save in a tax-efficient way. But whether or not you should invest in an ISA in 2023 will depend on several factors. We’ll look into the question in more depth – if you want to know the answer to “is an ISA worth it or not?”, please read on.
The Personal Savings Allowance explained
The term “personal savings allowance” (PSA) refers to the tax-free allowance you are entitled to on interests earned on savings in a regular savings account or a non-ISA savings account; you may not have to pay tax on that interest. The size of the allowance is dependent on your income tax bracket. It is as follows:
- £1,000 interest tax-free for basic rate taxpayers whose income is taxed 20%
- £500 interest tax-free for higher rate taxpayers whose income is taxed 40%
- No interest-free allowance for additional rate taxpayers whose income is taxed 45%
According to government statistics, the PSA results in 95% of savers not paying any tax on their savings interest.
In the UK, an ISA and PSA are two ways to save money while taking advantage of tax benefits. The thing that comes to mind when considering whether an ISA is worth it in 2023 is that it could be a more straightforward decision if you fall into the higher income tax brackets.
What PSAs cover
A PSA applies to any interest that you might earn in a number of savings vehicles, including:
- Bank accounts
- Building society savings
- Corporate bonds
- Credit Union accounts
- Government bonds and gilts
- Savings accounts
It also applies to any foreign currencies held in UK savings accounts, like Euros and US dollars.
The interest rate on cash savings today is relatively low. This means that you have to have a significant amount of savings before PSA becomes worthy of any real consideration. So, when asking, “are ISAs worth it at lower levels of savings” the answer is maybe – the risk involved means you should have at least enough to cover any potential losses. But asking “are Stocks and Shares ISAs worth” is a different question entirely and something we will discuss in more detail a little later.
Is an ISA worth it for higher-rate taxpayers?
Are ISAs worth it if you are a higher-rate taxpayer, especially in 2023? Yes, it is when you reach the PSA maximum threshold. As a basic rate taxpayer, for every £100 interest above your PSA in a savings account, you will lose 20%, or £20, to the taxman. As a higher-rate taxpayer, you will lose £40.
However, if you invest in an ISA, for each £100 of interest you make over your PSA threshold, you keep the lot. It’s 100% tax-free, so the more you make, the more you save – if you see what we mean. Also, with interest rates as low as they currently are, anyone looking to beat inflation and grow their wealth effectively over the long term should be considering an ISA.
Are ISAs a good idea from other viewpoints?
We’ve limited our discussion to interest so far. But is an ISA a good idea in 2023 from other perspectives? The answer is yes. An ISA can be a suitable option for many people, especially when there is an ISAs vs savings accounts debate.
ISAs are flexible
A good ISA gives you a huge amount of flexibility. If you choose the right one, withdrawing money from your ISA and repaying it without affecting your annual ISA allowance, which is £20,000, is permitted. The key is to ensure that you replace the funds in the same tax year. But before opening any accounts, you should check with your ISA provider, as not all ISAs offer this as a feature.
ISA allowances can be inherited
Why are ISAs worth it and good in the long run? Because since April 2015, couples have been allowed to inherit each other’s ISA allowance. The inheriting partner is entitled to an “additional permitted subscription,” otherwise known as an APS allowance. So, as well as having their own ISA allowance, the surviving partner also inherits the value allowance to which their deceased partner was entitled at the time of his or her death.
Why is a Stocks and Shares ISA worth It?
The types of ISAs and saving accounts we’ve talked about so far are cash savings accounts. When you start asking the question, are Stocks and Shares ISAs worth it? – we are looking at a very different picture.
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Current Interest Rates
As mentioned previously, the interest on offer in savings accounts is woefully low. Usually, the Bank of England’s base rate is at an all-time low – a measly 0.1%. It means that many people who are not overly financially savvy are earning interest in the region of 0.01%. But to meet the 2% inflation target, the Bank of England raised the base rate to 4.0%. So you need to be earning interest in the region of at least 4%. However, if you look around, you’ll find that the average annual interest rate on savings is from around 0.5% up to 3.5%.
The lower interest (0.5%) rate is typical of easy-access accounts, whereas the higher rate (3.5%) is for a fixed-term account, whereby you cannot access your savings until the term is up.
Would ISAs be still recommended with inflation?
With the upper end of interest on savings being in the region of 3.0%, for this cash to keep pace with its real value, inflation should also be around 2.0%. However, the fact of the matter is that as of January 2023, according to the ONS, consumer price index inflation is running at 10.1%.
So in real terms, if your savings are earning 3.0% in a fixed-term account, your money is devaluing at 7.1% per annum. And that’s at the high end of savings interest. At the lower end, it is devaluing by as much as 9% per annum. Unfortunately, the bad news doesn’t end there. Unfortunately, the Bank of England and other economic experts predict that the rate of inflation could fall to around 4% by the end of 2023.
Is an ISA a good investment?
If you’re asking yourself, do I still need an ISA? – Yes, if you’ve got anything like a substantial amount of money tied up in ordinary savings accounts and Cash ISAs, you really do, unless you’re content to let its spending power in real terms deteriorate badly. If you’re asking the question, are ISAs still best for rates, then yes, if we are talking stocks and share ISAs or investment ISAs, they certainly are.
Why choose an ISA?
By now, it will be pretty obvious to the reader that with ordinary savings accounts performing so badly in terms of interest and with inflation due to ramp up, you need a savings vehicle that can outperform inflation. So the question “why are ISAs good?” is answered by the fact that, on average, stocks and shares ISAs often significantly outperform other savings vehicles by some margin.
According to moneyfacts.co.uk, the average return of stocks and shares ISAs between 1 March 2020 and 2021 was 13.55%, beating the previous year’s average return of 13.3%.
Also, if you are looking to save towards retirement and you are considering SIPPs or ISAs, an ISA might be the better option if you want easy access to your savings at any time, making it a flexible option for people who need to access their money in an emergency.
The only thing that you have to consider is your attitude towards risk. Investing in the stock market does pose a risk, and your savings could decrease as well as increase, which is why you should only consider a stocks and shares ISA if you are intent on saving for the long term.
Transferring your ISA
An ISA transfer is the process of moving an existing ISA from one provider to another. You can transfer your ISA if you’re unhappy with your current provider’s charges, investment options, or customer service experience. You can also consolidate your ISA investments into one account with a combine ISA transfer.
Before you transfer your ISA to another provider, ensure the correct process is observed and do your research so that you don’t lose your tax-free status. There may be fees or penalties associated with an ISA transfer, and it’s important to weigh up these costs against the potential benefits of transferring.
What are the risks associated with investing in an ISA?
There are several risks associated with an ISA investment. For instance, stocks and shares ISAs are vulnerable to stock market volatility, which can cause the value of your investments to rise or fall. Cash ISAs are exposed to interest rate fluctuations, which can affect the return on your savings. There is inflation risk associated with any investment, which erodes the value of your investment. Your provider can go out of business, and you can lose all your money if it is not protected by FSCS.
Are ISAs worth it in 2023?
Investing in an ISA will depend on an individual’s financial circumstances, investment goals, and risk tolerance. However, an ISA investment can be a good option for people looking to save for the future in a tax-efficient way. But it’s important to be aware of the risks involved and to seek advice from a financial advisor if you’re unsure about the best investment strategy for your specific needs.
What are some of the benefits of investing in an ISA?
There are several benefits associated with ISA investing. They include tax-efficient savings, where the returns on ISA investments are tax-free. You can choose the investment strategy that suits your goals and risk tolerance, regardless of the type of ISA account. ISAs can be used to save for retirement as it is designed for long-term investing. If you have a flexible ISA, you can access your money without affecting your ISA allowance.
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