As a new tax year approaches, savers may well be readying their cash to invest in a new ISA, but the latest research by Moneyfacts.co.uk reveals why savers should still consider maximising their Personal Savings Allowance (PSA) for bigger returns.

Since April 2016, savers have been given an individual Personal Savings Allowance to earn a portion of savings income or interest tax-free, with basic rate (20%) tax payers given a £1,000 allowance and higher rate (40%) taxpayers getting £500. This momentous change means that now most taxpayers (estimated at 95%) no longer pay tax on their savings interest.

As interest rates remain poor compared to years gone by, savers would need to invest a significant sum to breach the allowance. In fact, if savers were to invest £20,000 (the new 2017/18 ISA allowance) in the best ISA instead of the best non-ISA, they would be worse off (as the table shows), while neither return would take them over the PSA limit.

Rachel Springall, Finance Expert at Moneyfacts.co.uk, said:

“It’s been almost a full year since the Government introduced the Personal Savings Allowance to enable savers to earn more savings interest tax-free. While this has been an ingenious way to encourage consumers to save, it has also had a big impact on the appeal of ISAs.

“ISAs overall have been struggling to keep up with the more desirable returns that standard savings accounts have on offer. In fact, only Coventry Building Society’s easy access ISA attempts to pay anywhere close to a non-ISA Best Buy equivalent, with a difference of 0.10%.

“The difference on average between ISAs and non-ISAs is clearly a worry. A year ago, the average one-year fixed ISA paid 1.31%, as did the non-ISA equivalent. Today, however, the average one-year ISA has fallen by 0.43%, whereas the average one-year non-ISA has fallen by a lesser 0.34%.

“Despite the allowances taxpayers receive, savers have still had to endure years of low interest rates due to Government lending initiatives, which were only exacerbated by the Bank of England’s decision to cut the base rate by 0.25% last year. All this combined has forced savings rates to plummet, making it vital for savers to keep on top of the Best Buys and to try not to be too discouraged when it comes to saving for the future.”

www.moneyfacts.co.uk - The Money Search Engine

Moneyfacts.co.uk is the UK's leading independent provider of personal finance information. For the last 20 years, Moneyfacts' information has been the key driver behind many personal finance decisions, from the Treasury to the high street.

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