Martin Lewis explains why 'it's time' for millions to reopen savings account

20 July 2023 , 08:37

365     0

Martin Lewis is founder of MoneySavingExpert.com

Martin Lewis has urged millions of Brits with savings to check if they should move their money into an ISA to save paying tax.

Savings rates have been steadily increasing over the last year, off the back of thirteen interest rate rises in a row by the Bank of England.

While this is good news for savers, Martin explained how rate rises mean more people are now earning enough in interest to be taxed.

If you’re a 20% taxpayer, you can earn £1,000 in interest each tax year without paying tax thanks to the Personal Savings Allowance.

For 40% higher rate taxpayers, the Personal Savings Allowance is £500, while additional rate taxpayers don't get any allowance.

8 money changes coming in February including Universal Credit and passport fees

However, if you have an ISA - or Individual Savings Account - you can save up to £20,000 each tax year without paying tax on the interest you gain.

Martin explained that cash ISAs usually pay less than normal savings, but they may benefit you if you would end up paying tax.

Writing in the latest MoneySavingExpert.com newsletter, Martin said: “It's time for millions to (re)open cash ISAs.

“The top pay 5.7%, and with rates rising, anyone with £8,000+ in SAVINGS, check now if your money's nisa in a cash ISA.”

Martin went on to explain how much you can have saved in top-paying accounts before you start paying tax on your interest.

Using the example of a one-year fix paying 6.15%, he said a basic 20% taxpayer would need to have £16,250 saved to generate £1,000 a year in interest.

For a higher rate 40% taxpayer, they would need to have £8,100 saved to get £500 a year interest. If you were to go above these amounts, you would pay tax on your savings.

In the example of a top easy-access savings account paying 4.51%, Martin said a 20% taxpayer would need to save £22,200 to generate £1,000 a year interest.

Meanwhile, a 40% taxpayer would need to save £11,100 to get £500 back in interest.

But if you don't have enough in savings to hit these thresholds where you would need to pay tax, Martin said getting a cash ISA is “generally not” worth it.

Big Four banks made £20billion in 9 months as households battled interest rates

He said: “Top normal savings pay more, and if rates increase so that you would pay tax, you can shift £20,000 into a cash ISA straightaway.”

But he added: “Though if you're looking to get a fix, cash ISAs have the advantage that you can withdraw money in an emergency.”

At the time of writing, the top easy-access cash ISAs pay 4.2% - or you can get 5.9% fixed for two years.

Levi Winchester