Three Things That Make A Cash ISA Different From Traditional Savings Accounts
The Cash ISA (Individual Savings Account) has become a household name as many people are finding it to be an effective savings tool to help them get the most from their money.
However for others there seems to be an air of confusion about how ISAs actually work and how they compare to the more traditional savings options.
This article will explore some key factors which differentiate one from the other.
1) ISAs wrap your money in a 'tax-free' wrapper The tax protection aspect of an ISA is possibly the biggest difference to traditional savings accounts.
An ISA account works as a barrier between your savings and the taxman to an extent.
This means that while your savings are below the tax-free threshold - currently £5,640 for the year 2012/13, the interest that you earn will be exempt from tax deductions.
2) Withdrawing money from an ISA might not be as easy as from a traditional savings account Once money has been withdrawn from an ISA, it cannot be returned.
For example, the current tax threshold is £5,640 therefore that is the total amount which will be 'wrapped' against tax deductions.
If you choose to invest £3,000 at the beginning of the tax year and then to withdraw £1,000 in the middle of the year to purchase something, you can still only save a further £2,640 in your Cash ISA account for that year.
Therefore it is important that you are aware of how much you are withdrawing and the implications of this as it is not as simple as the withdrawal processes that may have been offered to you from easy access savings account.
In order to reap the fullest benefits from your ISA account, you may wish to refrain from making withdrawals for the duration.
3) The gross interest rate on Cash ISAs is tax efficient - what you see is what you get Many people make the common error of thinking that Cash ISAs pay out a lower rate of interest than other savings accounts because of the gross interest rates.
The truth is that it is not a case that one pays better rates of interest than the other - there are a number of different savings options on the market nowadays with very competitive rates.
However the difference can lie in the fact that the gross interest rates advertised on accounts does not consider the impact of tax.
Therefore on a normal savings account, you will never see a percentage of the gross interest earned dependent on the rate of tax that you pay - 20% for basic rate taxpayers and 40% for those paying the higher rate.
With ISAs, the amount of interest stated is the amount that you will receive.
Know your facts Your Cash ISA allowance makes up just part of your overall annual £11,280 ISA allowance.
In addition to the Cash ISA, there are also a number of other options available such as savings bonds and fixed rate bonds.
In an economic climate where every penny counts and we all want to make the most of our money, it is important to shop around for the deals to meet our personal circumstances and get the highest returns on our savings.
For more information on Cash ISAs and other types of savings accounts, you may find it beneficial to speak to a savings adviser who could help you make informed decisions to suit your financial needs.
However for others there seems to be an air of confusion about how ISAs actually work and how they compare to the more traditional savings options.
This article will explore some key factors which differentiate one from the other.
1) ISAs wrap your money in a 'tax-free' wrapper The tax protection aspect of an ISA is possibly the biggest difference to traditional savings accounts.
An ISA account works as a barrier between your savings and the taxman to an extent.
This means that while your savings are below the tax-free threshold - currently £5,640 for the year 2012/13, the interest that you earn will be exempt from tax deductions.
2) Withdrawing money from an ISA might not be as easy as from a traditional savings account Once money has been withdrawn from an ISA, it cannot be returned.
For example, the current tax threshold is £5,640 therefore that is the total amount which will be 'wrapped' against tax deductions.
If you choose to invest £3,000 at the beginning of the tax year and then to withdraw £1,000 in the middle of the year to purchase something, you can still only save a further £2,640 in your Cash ISA account for that year.
Therefore it is important that you are aware of how much you are withdrawing and the implications of this as it is not as simple as the withdrawal processes that may have been offered to you from easy access savings account.
In order to reap the fullest benefits from your ISA account, you may wish to refrain from making withdrawals for the duration.
3) The gross interest rate on Cash ISAs is tax efficient - what you see is what you get Many people make the common error of thinking that Cash ISAs pay out a lower rate of interest than other savings accounts because of the gross interest rates.
The truth is that it is not a case that one pays better rates of interest than the other - there are a number of different savings options on the market nowadays with very competitive rates.
However the difference can lie in the fact that the gross interest rates advertised on accounts does not consider the impact of tax.
Therefore on a normal savings account, you will never see a percentage of the gross interest earned dependent on the rate of tax that you pay - 20% for basic rate taxpayers and 40% for those paying the higher rate.
With ISAs, the amount of interest stated is the amount that you will receive.
Know your facts Your Cash ISA allowance makes up just part of your overall annual £11,280 ISA allowance.
In addition to the Cash ISA, there are also a number of other options available such as savings bonds and fixed rate bonds.
In an economic climate where every penny counts and we all want to make the most of our money, it is important to shop around for the deals to meet our personal circumstances and get the highest returns on our savings.
For more information on Cash ISAs and other types of savings accounts, you may find it beneficial to speak to a savings adviser who could help you make informed decisions to suit your financial needs.
