The 2015 Budget confirmed ISAs as the savings product of choice for the coalition government. Not only did George Osborne introduce the ‘Help-to-buy’ ISA, he also allowed greater flexibility to move money in and out of ISAs without affecting the annual allowance. The Chancellor did however introduce changes to the way interest is paid on savings, which may dent the appeal of cash ISAs.
The new ‘Help-to-buy’ ISA will see the Government contribute £50 for every £200 paid towards a house deposit by first-time buyers, up to a maximum of £3,000. Treasury estimates suggest as many as 285,000 could use the scheme every year.
The Home Builders Federation endorsed the scheme, saying it should encourage people to save for a new home, thereby maintaining demand for new-build homes and helping with the housing shortage. However, the scheme has not met with universal approval, with the Institute for Fiscal Studies labelling it a “dubious” policy that could push up house prices further. The organisation said much of the benefit would go to those who had already saved for a deposit.
The Chancellor also announced greater flexibility in taking money out of ISAs and then reinvesting it. Previously, if an investor took money out of an ISA in a tax year, they would automatically lose that part of their annual allowance. Any reinvestment would count towards the annual limit. Osborne has now promised “complete freedom” on moving money in and out of ISAs. Investors will now have the flexibility to withdraw and reinvest into ISAs without losing their tax-free allowance.
This was all positive for ISAs. However, the Chancellor may have dealt an unintentional blow to cash ISAs by announcing the first £1,000 of all savings will now be tax-free. With an ISA paying 1.5% say, this means investors could save almost £67,000 before hitting the limit and, as such, many conventional savings accounts may look just as attractive as cash ISAs.
ISAs still have a number of advantages – for example, interest rates should rise over time, taking investors over the £1,000 limit more quickly and making cash ISAs look more attractive. Equally, people who use their ISA allowance year after year may exceed the allowance in perhaps five years and therefore may prefer to have it sheltered in a tax-free structure. Still, for now, it provided another reason to think hard before saving in cash ISAs.