An Update on Savings and ISAs

With interest rates on offer to savers continuing at record lows, the government has been busy introducing various tax incentives to encourage saving. However, these don’t always quite work out as intended.

This tax year, a tax-free personal savings allowance was introduced. For basic rate taxpayers, this exempts up to £1,000 of savings income, with a £500 limit for higher rate taxpayers. Many savers are now using bank current accounts that offer rewards as a way of achieving better returns. For example, one popular current account pays a £5 monthly reward if £750 or more is paid in each month and at least two different direct debits are paid out.

However, HM Revenue & Customs has recently confirmed that these rewards are ineligible for the personal savings allowance because they are not classed as savings income.

The Help-to-Buy ISA

Then there is the Help-to-Buy ISA which became available from 1 December 2015. The government tops up an investor’s Help-to-Buy ISA savings with a 25% bonus (up to a maximum of £3,000) when the savings are used to buy a first home.

The scheme has recently come in for criticism because the bonus is not paid until completion of the property purchase. It cannot be used for the deposit due at exchange of contracts.

The Treasury has now announced that funds in a Help-to-Buy ISA can be transferred into a new Lifetime ISA (LISA) from April 2017. LISAs benefit from a government bonus which will be available to pay deposits. However, money saved in a LISA cannot be used for a year after the account is opened.

The Innovative Finance ISA

As a result of further relaxation of the ISA rules, from 1 November it will be possible to hold certain company and charity debentures and bonds made available through a crowdfunding offer within an Innovative Finance ISA.

The Innovative Finance ISA itself was only introduced this April in order to bring peer-to-peer lending can be up to 7%, but this higher return comes with a risk warning.

Although peer-to-peer savings firms have introduced various ways of mitigating the impact of bad debts, any losses are not covered under the £75,000 per person Financial Services Compensation Scheme. Furthermore, peer-to-peer lending has so far never really been tested by a financial crisis – so think carefully about Brexit here.

As always, we are able to provide you with advice so don’t hesitate to get in touch