Millions of households missing out on free cash by having the wrong account – easy £1 switch to make now

MILLIONS of households are missing out on free cash by having their savings in the wrong type of account.

The warning was issued on this morning‘s episode of BBC Morning Live.

Finance expert Laura Pomfret explained how millions of Brits are missing out by not saving their cash in an ISA.

Individual savings accounts, also known as ISAs allow individuals to save up to £20,000 a year tax free.

Unlike with a conventional savings account, any income or gains you make in an ISA are shielded from tax.

Laura said: “There are 40 million individuals in the UK that do not have an ISA… you don’t need a large sum of money to open an ISA.

“You can do it with a pound. It’s kind of a no-brainer if you’re up for it.”

Historically, only higher earners have been hit with tax bills for saving their cash.

However, in recent years, the personal savings allowance – the amount you can earn in savings interest before paying tax – has been frozen, and at the same time, interest rates on savings have remained high.

This means even some lower earners have been stung with tax bills for saving their pennies.

The two factors combined have seen lots more savers than usual being dragged above the personal savings allowance threshold.

This is currently set at £1,000 for basic rate taxpayers or £500 for high rate taxpayers.

By saving into an ISA, you’ll avoid this tax entirely, as long as you’re saving less than £20,000 a year.

You’ll still earn a similar amount in returns too.

The top-earning, easy-access cash ISA, with Trading 212, currently rewards savers with returns of up to 5.2%.

Savers with a conventional easy-access savings account would struggle to beat this rate.

However, it’s important to recognise that there are five different types of ISAs.

We’ve explained how each ISA format works below.

Cash ISA 

Cash ISAs can be opened by anyone 18 or over, and a maximum of £20,000 can be deposited into one per tax year.

There are different types of cash ISAs and they will each come with their own set of rules. 

Easy-access ISAs let you add money in which can be taken out at any time without a charge.

Fixed-rate ISAs tend to offer higher interest rates than easy-access ISAs, but you will probably have to pay a fee for withdrawing money before the end of the term.

To make the most out of your cash ISA, it’s best to start saving in one early. 

You’ll earn tax-free interest on any savings put into a cash ISA from April 2024 right up until April 2025. 

That number would only increase if you added more to your cash ISA and could reach thousands by April 2025.

If you plan on making withdrawals at any point during the year, it’s best to check your cash ISA rules, as this will affect your annual ISA allowance. 

Under new rules, you must be aged 18 or over to open a cash ISA as opposed to age 16 or over in the previous tax year.

Stocks and shares ISA

Stocks and shares ISAs can be opened by anyone 18 or over, and the maximum amount you can put into one is £20,000 per tax year.

Another thing to bear in mind is that a stock and shares ISA usually involves paying a number of fees.

Any money invested in a stock and shares ISA is subject to stock market changes, so there is a chance your money could decrease after you invest it. 

However, if you invest in a company that hands out dividends and performs well, you could benefit from 12 months of dividend payments if you do so this month.

Lifetime ISA

Anyone between 18 and 39 can open a lifetime ISA and deposit a maximum of £4,000 per tax year into one.

You can keep adding money into one up until you are 50 and must make your first payment into one before the age of 40.

You get a 25% bonus on top of any personal contributions.

So, if you added £4,000 to one this tax year, the government would give you £1,000 free.

However, you must use this money to buy your first home or save for retirement.

Most people find it easier to save in a lifetime ISA with small monthly payments. 

For example, if you wanted to save £4,000 to get your full £1,000, you would save around £333 a month. 

But anything you put in a lifetime ISA will start earning interest straight away, so the more money you put in straight away, the more interest you will earn.

IFISAs

Anyone 18 or older can open an IFISA (innovative finance ISA) and deposit a maximum of £20,000 into one each tax year.

But you can lose money through an IFISA if the people you’ve lent to can’t afford to repay the loan.

Another disadvantage is that withdrawing money from one can take a while.

If a business does well and you invest early, you have more time to earn interest the sooner you invest.

Under new rules from today, you can now hold multiple ISAs of one kind.

This will be useful for investors who want to use more than one provider or have different ISAs for different financial goals.

You will also be able to do partial transfers of ISA funds no matter when you paid the money in – although you still won’t be able to pay in more than your annual ISA allowance.

Junior ISA

Junior ISAs (JISA) can be set up for any child under the age of 18 and living in the UK.

You can save up to £9,000 a year in one of the accounts, and the child can then withdraw the money when they turn 18.

That said, the child can take control of the account when they turn 16.

Just like a Lifetime ISA, the more and the sooner you invest in a Junior ISA, the more interest your child will earn over time.