21 March 2016

Personal Savings Allowance: do I still need an ISA?

3 minute read


  • The PSA comes into force from 6 April and means that up to £1,000 of savings income1, such as the interest you receive on your savings account, will be tax-free for basic taxpayers, while those on the higher rate will be able to earn up to £500 of savings income tax-free
  • It’s not just the savings market that may impact your situation; a change in personal circumstances could also have an effect
  • The Government is allowing providers to offer flexibility on ISAs. So, with some providers, you’ll be able to replace money withdrawn from some ISA products during the same tax year, without impacting your annual ISA allowance.

Nationwide’s Head of Savings, Tom Riley, looks at whether ISAs still have a place for savers after the Government introduces the new Personal Savings Allowance (PSA) on 6 April 2016.

You may be aware that since the Government announced that it would be launching the PSA, there has been plenty of debate about whether it will sound the death-knell of ISAs.

I don’t think it should spell the end to the traditional cash ISA and you should still consider opening one, particularly if you have a larger amount of savings. It’s important, though, that you understand the new changes to ensure you choose the best savings account to maximise your savings.

The PSA comes into force from 6 April and means that up to £1,000 of savings income1, such as the interest you receive on your savings account, will be tax-free for basic taxpayers, while those on the higher rate will be able to earn up to £500 of savings income tax-free. It’s important to remember that the annual £1,000 PSA limit is based on how much interest you earn during the tax year, rather than how much money you have in your account.

In the current environment, it would take a significant pot of money before tax needs to be paid (as outlined below). The rules mean the majority of savers will have no tax to pay on any interest earned.

Basic rate taxpayers (20%)

Savings Annual interest (1.5%) Tax paid currently Tax paid after
April 2016
£25,000 £375 £75 £0
£50,000 £750 £150 £0
£75,000 £1,125 £225 £25
£100,000 £1,500 £300 £100
£150,000 £2,250 £450 £250

Higher rate taxpayers (40%)

Savings Annual interest (1.5%) Tax paid currently Tax paid after
April 2016
£25,000 £375 £150 £0
£50,000 £750 £300 £100
£75,000 £1,125 £450 £250
£100,000 £1,500 £600 £400
£150,000 £2,250 £900 £700

“So are ISAs still relevant for savers? In a nutshell, yes.”

While, in the short term, it could be argued that the introduction of the PSA means that ISAs will lose their main selling point - a place where people can save completely tax-free - that is perhaps short-sighted. It’s important to think longer term because, while you may be comfortably within your personal savings allowance at present, that situation could change. If and when interest rates start to rise, the £1,000 allowance may get eaten up more quickly than it is at present.

It’s not just the savings market that may impact your situation; a change in personal circumstances could also have an effect. For example, a pay rise at work could change what tax bracket you’re in, which in turn would impact your annual personal savings allowance. This is because higher-rate taxpayers get a lower allowance, and those on the top-rate (45%) don’t get any allowance at all.

It’s not just the here and now where I think ISAs are an option because spouses can inherit their partner’s ISA allowance upon death, whereas the new personal savings allowance can’t be inherited.

Also, from 6 April, the Government is allowing providers to offer flexibility on ISAs. So, with some providers, you’ll be able to replace money withdrawn from some ISA products during the same tax year, without impacting your annual ISA allowance. Any withdrawals need to be replaced before the end of the tax year though and you can’t carry forward any unused ISA allowance from previous years - so it’s a case of use it or lose it!

So, while the introduction of the PSA is certainly one of the biggest changes seen in the savings market for many years and will mean the vast majority of savers across the country will be able to save tax-free, the reasons outlined above are just some of the points why I think ISAs remain an option. I would encourage people to take the time to consider which account best suits them.


1 What counts as savings income?

The content displayed on our recent news and articles page is for information purposes only, and is accurate at the time of publication. The information will not be maintained, and so we cannot guarantee that at any given time the information will be up to date or complete. Please verify any information you take before relying on it.

Nationwide is not responsible for the content or availability of external websites. Nationwide does not make any recommendation or endorse any advertising, products, services or other content on such external websites. Views expressed on third party websites are those of the public and unless specifically stated, are not those of Nationwide.

About the author

Tom Riley

Tom Riley is Nationwide’s Head of Savings -responsible for managing the Society’s savings products on behalf of its 11 million savers.

Most popular

Your Black Friday survival guide

11.11.16

Black Friday tips and tricks to take the stress out of your Christmas shopping so that you can concentrate on finding the perfect presents.

You may also be interested in...

Our helpful guides

We've created a range of helpful guides to help you make better financial decisions regardless of your circumstances. Find out more about owning property, growing wealth and planning for life events.

Our products

Whether you are after a current account, a savings account or even looking for a mortgage, Nationwide has a range of great products that could help you, no matter the situation.