Cash ISAs are more than just a way to keep a bit of your money. Used wisely, in certain circumstances, the annual ISA allowance can save you from tax bills running into thousands of pounds.
Below, we share the top tips on how to use them most effectively from Hargreaves Lansdown head of personal finance Sarah Coles.
1. When you retire and need to boost your emergency fund
Working households are typically advised to keep between 3 to 6 months living expenses in an easy access account as an emergency fund.
For most households, this amount β typically under Β£12,000 β would fall within the current Β£20,000 tax-free savings allowance for Individual Savings Accounts (ISAs).
However, Coles suggested that those who are due to retire should have emergency savings of up to Β£43,200, based on the minimum retirement income of Β£14,400.
You will need to plan in advance to avoid paying tax on this level of savings and the interest generated from them above the standard Β£1,000 annual allowance . This can be achieved by taking advantage of the Cash ISA Β£20,000 tax free allowance for several years in a row.
2. When youβre planning future care costs
If you need to pay for care costs for yourself or a family member at short notice, it may be necessary to hold the money in cash savings.
However, these costs can be extortionate β more than Β£30,000 a year β and therefore cash savings need to be planned in advance to avoid being taxed. Using the Β£20,000 ISA allowance for several years in a row is key here.
3.When youβre saving for a property deposit
In England, the average first time deposit is Β£68,154, while in Scotland it is Β£30,787.
For young people saving for the first home, even if they make full use of the Lifetime ISA annual Β£4,000 allowance, making use of the standard Β£20,000 ISAΒ allowance could be key to fully benefitting from what youβve earned.
4. When you have money set aside for a tax bill
If you work for yourself, you should plan to save a portion of your earnings to pay your annual self-assessment tax bill when it comes due.
Depending on how much money you need to save, putting the cash away in an ISA could save you from having to pay tax on this money on top of paying your tax bill.
5. When you inherit
If you inherit a significant amount of assets, it is quite likely you will either want to put some away as cash savings, either temporarily while you sort out the details or as a long term fund. To avoid this becoming a tax problem, consider putting the cash away in an ISA.
6. When you expect your circumstances to change
Are you moving up the career ladder or expecting a big pay rise? Then you may find your personal savings allowance will halve or disappear overnight.
By planning ahead and putting your savings in ISAs, you can avoid this suddenly becoming an issue.
Robin has more than six years of experience as a financial journalist, most of which were spent at Citywire, and covers the latest developments in the investing, trading and currency transfer space. Outside of work, he enjoys reading literature and philosophy and playing the piano.
You can contact Robin at robin@goodmoneyguide.com
