Martin Lewis has issued a warning to anyone with a cash ISA that millions of people with this type of account are being underpaid.
Cash ISAs are tax-free savings accounts, meaning that you pay no tax on the interest you earn on your savings. But Martin explained in his latest MoneySavingExpert newsletter that anyone who has or is considering opening a cash ISA should carry out three important checks to ensure they are making the most of their savings.
Firstly, the finance pro warned that normal savings accounts "beat" cash ISAs for most people, as your Personal Savings Allowance means that you would need to have £34,500, or £17,500 if you're in the higher tax bracket, in a top easy-access savings account before you earned enough interest to start being taxed on it. People on the basic 20% tax rate can earn up to £1,000 interest a year on any savings account tax-free, while those on the higher 40% rate can earn £500 a year.
READ MORE: Martin Lewis urges Brits to spend £1 now to save hundreds in the future
Taking to Twitter, Martin listed his three essential cash ISA questions to ask yourself:
- Could you earn more in normal savings?
- Should you switch your cash ISA to earn more?
- Should you pay a fixed penalty to "ditch and switch"?
Martin said that many easy-access paying cash ISAs pay out "diddly squat", often under 1%, as he urged people to check their accounts. "If it's pants, simply open a new top-paying cash ISA, and usually in the application form you can ask the new provider to transfer your existing cash ISA(s) to it - don't just withdraw the money though, as then you lose the ISA status," he explained.
If a cash ISA is right for you, then Martin advised taking advantage of the current top rates as these have more than trebled in the last year. "For those with larger savings, as a cash ISA is just a savings account you can put £20,000 in per tax year where interest is never taxed - and doesn't count towards the Personal Savings Allowance - then for savings that would have tax taken off, they're a winner," he explained on the MSE website.
"So you could have normal savings for some of your money, cash ISAs for the rest. It can also be worthwhile having some in cash ISAs if, while you don't pay tax on savings now, you would if interest rates rose."
The MoneySavingExpert website offers a new ISA calculator to help those with a fixed-term ISA work out whether they should "ditch and switch" to a normal savings account instead. This looks at factors such as how much is in your ISA, what the interest rate is, and the penalty to withdraw your savings to determine what's right for you.
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