What is the future for Isas?
The new tax year saw major changes to the way interest and dividends are taxed. With the introduction of two new allowances plus increases to existing allowances, the Treasury estimate that 95 per cent of savers will no longer pay any tax on their savings.
So what does this mean for individuals, and will Isas still be a useful place to save or are they set to become redundant?
Previously, for every £100 of interest earned (for example on a savings account), a basic-rate taxpayer paid £20 in tax and a higher-rate taxpayer £40.
However, since 6 April 2016, basic and higher-rate taxpayers have been eligible to receive some savings income completely tax-free through the introduction of a new personal savings allowance (PSA).
ARE ISAS STILL WORTH HAVING?
The new PSA means a basic-rate taxpayer can earn up to £1,000 in savings income tax-free, while higher-rate taxpayers earn up to £500.
Savings income includes the interest you earn on bank and building society accounts, plus interest from other investments such as corporate bonds and gilts.
In the current low interest rate environment, this new allowance is potentially very valuable.
A basic-rate taxpayer would be able to save £100,000 at 1 per cent interest, before having to pay any tax, and a higher-rate taxpayer could save £50,000 at the same rate before paying any tax. There is no allowance for additional-rate payers.
But these new allowances prompt the question: are Isas still worth having?
When thinking about this question it is important to realise that these new allowances may have been introduced, but they could also be taken away or revised in the future.
It is also worth noting that £1,000 a year interest seems a lot in the current interest rate environment, but if savings rates go up in the future - to 5 per cent, say - a basic-rate taxpayer would only be able to earn £20,000 of interest before paying any tax, and a higher-rate taxpayer just £10,000.
Also in this new tax year changes were made to the taxation of dividends. The 10 per cent dividend tax credit has been replaced by a new tax-free dividend allowance of £5,000.
This means that share owners won't have to pay tax on the first £5,000 of dividend income, no matter what other income they have.
However, those dividends still count towards the basic and higher rate bands, and so they may affect the rate of tax paid on additional dividends received above the allowance. This is where Isas are useful, as dividends from shares held in an Isa remain tax-free.
Isas can play a significant part in creating a tax-efficient investment strategy, especially as they shelter not only investment income but also capital gains from tax.
Additionally, there is no need to keep records of Isa returns for the taxman, as these investments don't have to be declared on a self-assessment tax return.
The current Isa allowance of £15,240 remains generous and is set to rise to £20,000 next tax year. By having a strategy to use Isas each year, it is possible, for some, to protect all of their savings from future income and capital gains taxes.
However, it's also important to realise that Isas are one of several saving vehicles that individuals can utilise whilst saving for retirement. The pension changes brought freedom and choice for pension savers, but as a consequence all savings must be considered when you are planning for retirement.
This includes pensions, Isas, shares and any cash savings, plus those of your spouse or partner. Also factors like your tax status, health, longevity, property, and any possible inheritance or additional assets all need to be taken into account.
Well-thought-out planning could help savers to minimise tax and maximise potential income in retirement.
Jonathan Watts-Lay is a director of WEALTH at Work.