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Making the Most of Your ISA Allowance this tax year

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The new tax year is upon us! Why it’s crucial for you to think about your tax-free allowance, according to our savings director Derek Sprawling

After a long first quarter of the year, dominated by the UK’s third national lockdown, spring is finally here! And with this, the new tax year. Now is a good time to take stock of your finances and think about your new ISA allowance.  

I think it’s fair to say that 2020 was not a good year for cash ISAs. Growth within the category last year was nearly seven times slower than it was in 2019, dipping from 4.9% to just 0.7%.  

Even during tough market conditions, it remains essential for you not to overlook your tax-free savings allowance. ISAs are an important savings resource and can play a key role in building long-term savings

Non-interest bearing market is growing 36 times faster than cash ISAs

Over the course of 2020, household deposits have reached record highs as reduced spending has led to a lot of people saving more money than usual. Indeed, Bank of England data reveals that the ‘individual’ deposits market is now worth a record £1.49 trillion.

Of that figure, a massive £225.5 billion of British savers’ cash is sitting in accounts that do not earn any interest at all. In fact, the non-interest bearing market has increased by 25% in 2020. In contrast, the ISA market has increased by a fraction of that figure at 0.7%, which means that account balances earning no interest are growing 36 times faster than ISAs. 

It’s clear from the data that some British savers have turned their back on cash ISAs during the pandemic. Of course, we know that the current market has a lot to do with this, with savers giving in to inertia. However, we’d encourage our customers who are hesitant to use up their ISA allowance this year to consider the role ISA allowances play in creating lifelong savings.

Focusing on the long-term picture 

In overlooking ISAs this tax year, many savers are losing sight of the bigger picture, and the role of tax-free savings in building potential long-term savings.  

Even while market rates fluctuate, ISA allowances are designed to build up tax-free savings over a saver’s lifetime, and the yearly allowance is a ‘use it or lose it’ scenario.  

While your savings might be earning a lower rate than usual in a cash ISA at the moment, as the Bank of England base rate remains at a historic low, the market will eventually recover. When it does, those savings will remain tax-free and they can be consolidated into another product, or transferred to a stocks and shares ISA.  

By not using an ISA allowance because of the current market conditions, savers are missing out on the opportunity to potentially increase their long-term tax-free savings.  

There are also other benefits to utilising your ISA allowance. For savers that complete tax returns each year, holding money within ISAs make the process easier as there is no tax to pay on ISA savings while no capital growth or interest needs to be declared either. 

ISAs can also be used to build additional retirement income, as you can top it up gradually year after year into a lump sum, and then draw a tax-free income from your ISA pot when it’s time to retire.  

We understand that market rates at the moment are challenging, and with ISA rates often lower than non-ISA products, it’s tempting to save the money away from cash ISAs. For this reason, Paragon strives to match rates on easy access ISAs to those offered on non-ISA easy access products, so savers can benefit from tax-free savings even in the current market.  

Now that the new tax-year has started, we would encourage all savers to take stock of their finances and make sure they make the most of their tax-free allowance.  

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*AER stands for Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded on an annual basis.

Paragon Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England number 05390593. Registered office 51 Homer Road, Solihull, West Midlands B91 3QJ. Paragon Bank PLC is registered on the Financial Services Register under the firm reference number 604551