Tax Free Savings

Finding spare cash to stow away for the future can be challenging. Fortunately, there are allowances in place to ensure lower income earners are entitled to tax-free savings income.

What is a Cash ISA?

Just like a savings account, a Cash ISA (Individual Savings Account) is a safe, secure way to store your money. The only difference is that any interest you earn on your savings is tax-free.

What are the benefits of an ISA?

There are many reasons to opt for a Cash ISA over alternative savings accounts. Not the least of these, is that they’re a great way of saving for your future. Other benefits include:

  • Currently, all basic rate taxpayers can earn £1,000 of tax-free savings interest per year, under the Personal Savings Allowance (PSA). However, there is no guarantee that this won’t change in the future. With ISAs, you’re guaranteed your savings will always be tax-free. Investing your allowance each year means you can grow your savings without having to pay any tax.
  • If you were to opt for an alternative regular savers account and savings interest rates increased, the money you’d saved may tip you over the Personal Savings Allowance limit.
  • Some types of Cash ISA come with the added benefit of government boosting. For example, the 25% government bonuses offered with Help to Buy ISAs and Lifetime ISAs. 

Are ISAs tax-free?

Yes, with a Cash ISA you can rest assured your savings are not only tax-free, but safe from changing regulations.

The only time when a Cash ISA isn’t exempt from tax is if you are aged 16 or 17 years old, and the money in your account is a gift from a parent. If this is the case, your parents may have to pay tax if parental settlement rules apply.

Cash ISA rules

  • To be eligible for a Cash ISA, you must be aged 16 or over and a UK resident. The only exception to this is in the case of Lifetime ISAs, that require you to be 18 years old
  • You can only open one Cash ISA per year
  • You have a single ISA allowance each year, which you can divide between a Cash ISA, a stocks and shares ISA, an Innovative Finance ISA and/or a Lifetime ISA. With a Lifetime ISA, the maximum allowance is £4,000 each year, meaning you have up to £16,000 to split between the other types

How much can I put in an ISA?

The total amount you can put into a Cash ISA for the 18/19 tax year is £20,000. This is known as the ISA allowance and is available to every person over 16 in the UK. You have the choice of using up the maximum allowance in one account, or splitting between the different types of ISA products.

Any interest your ISA earns doesn’t count towards your Personal Savings Allowance.

When is the ISA deadline?

The ISA deadline is midnight on 5th April each year; this is the end of the tax year. Any unused allowance doesn’t roll over into the new tax year, so you should try to make the most of your allowance before the deadline comes around. For more information on the ISA deadline, refer to our ISA deadline guide.

What are the different types of Cash ISA?

There are a number of different Cash ISAs available to help you achieve your savings goals. Whether you’re saving for your first home or setting up a nest egg for your golden years, there’s an option to suit you.

Fixed Rate ISAs

A Fixed Rate ISA pays a guaranteed amount of interest for a set period of time, from six months to five years. Though withdrawals are permitted, they’re subject to penalties. Consequently, a Fixed Rate ISA is better suited to those who won’t need immediate access to their savings.

Help to Buy ISAs

A Help to Buy ISA is a government scheme designed to help you save for a mortgage deposit on your first home. To qualify, you can’t own a property anywhere in the world.

You can save up to £200 a month in a Help to Buy ISA, and they come with the added bonus of government contributions. In this case, your savings could be boosted by 25%. The minimum government bonus is £400, so you will have to have saved at least £1,600 to qualify for a government bonus.Please note, Help to Buy ISAs are due to be withdrawn in November 2019.

Lifetime ISAs

A Lifetime ISA is a tax-free savings account that also offers a government bonus of 25% on top of the money you put in, up to a maximum of £1,000 a year. With a Lifetime ISA, you can deposit as much as £4,000 per year until the age of 50. Lifetime ISAs can only be opened and funded by those aged 18 to 39.

Junior ISAs

Junior ISAs are tax-efficient ways of saving for your little one’s future. You must be 16 or over and a UK resident to open a Junior ISA on behalf of a child, or be a child aged 16 to 18 to open one for yourself. The Junior ISA allowance for 2019/20 is £4,368.

Find everything you need to know about Junior ISAs here.

Refer to our Cash ISA page to discover the full range of ISAs available with Newcastle Building Society.

How many ISAs can I have?

You can have multiple ISAs at one time, but you can only open or pay into one of each type of ISA using your £20,000 allowance. 

Though you can only open one Cash ISA each tax year, there’s no limit to the number of ISA transfers you can make, should you spot a better interest rate with another provider. However, with Newcastle Building Society, you can open multiple cash ISAs using our CustomISA service. You can find more about that here.

What happens if I take money out of my ISA?

Withdrawals are permitted from most ISAs. However, if you make a withdrawal from a Fixed Rate ISA, you will be subject to a penalty in the form of a loss of interest on your savings.

If you think you will need access to your savings quickly, then you may be best suited to an ISA that doesn’t penalise withdrawals.

In relation to the Lifetime ISA a penalty of 25% of the withdrawal amount will be deducted unless the funds are being used for either:

  • Buying your first house (the account must have been held for a minimum 12 months)
  • You reach the age of 60
  • You are diagnosed with a terminal illness and have less than 12 months to live

Can I transfer my ISA to another provider?

You are permitted to unlimited transfers each tax year. However, you should always check that your new provider accepts transfers, as not all banks and building societies are obliged to do so

Avoid withdrawing money from your ISA yourself, as your savings may lose their tax-free status!

There are a number of reasons you may want to transfer to a new provider. For example, if you’ve spotted better rates elsewhere. Read our complete guide to the ISA transfer process for more information.

Can I inherit an ISA?

If your spouse or civil partner passes away, you will be eligible to receive an Inheritance ISA Allowance. Read more information about inheritance tax allowance in our helpful inheritance tax allowance guide.

Applying for a Cash ISA with Newcastle Building Society

If you'd like to apply for a Cash ISA at Newcastle Building Society, the process is really simple. We also accept ISA transfers, including Lifetime ISAs. To get the ball rolling, simply browse our Cash ISA product range or contact us.​

Most people can earn some savings interest without having to pay tax. See below our complete guide to tax-free savings. From how your tax is calculated to reclaiming tax when you have overpaid, you will find all you need to know about paying tax on savings interest.

How is my tax on interest calculated?

Your allowance for earning interest tax-free is made up of the following:

Personal Allowance

The Personal Allowance is the amount of income you can earn without having to pay tax. The standard Personal Allowance is £12,500 for the 2019/20 tax year.

Personal Savings Allowance

You also have a Personal Savings Allowance, which is the maximum amount of tax free savings you’re entitled to.  It is calculated based on which tax band you fall into. For Basic Rate taxpayers, the Personal Savings Allowance is £1,000. For more information on the tax free savings allowance, read our complete guide to the Personal Savings Allowance.

Starting Rate for Savings

In addition, the Starting Savings Rate entitles you to up to £5,000 of savings interest tax-free. However, the size of your Starting Rate for Savings will depend on your income. The more you earn from other income, such as your wage or your pension, the less your Starting Rate for Savings will be. You’re not eligible for the starting rate for savings if your other income is £17,500 or more.

For example, if you earn £13,500 your starting rate for savings would be a maximum of £4,000. This is because for every £1 you earn over the Personal Allowance, your Starting Rate for Savings is reduced by that same amount.

Examples

All examples assuming personal allowance of £12,500 and personal savings allowance of £1,000.

Amount of Income

Tax to Pay

Employment Income

Savings Income

£10,000

£5,000

Employment

NIL

Savings

NIL

£17,000

£1,000

Employment

20% on £4,500

Savings

NIL

£14,000

£3,000

Employment

20% on £1,500

Savings

NIL

£17,000

£4,000

Employment

20% on £4,500

Savings

 20% on £2,500

 

What happens if I go over the allowance?

If you exceed the tax allowance, tax will be collected automatically through the pay-as-you-earn (PAYE) system, using information from banks and building societies. If this is the case, you should be issued with a notice of coding.

The types of interest covered

The allowance applies to any interest from:

  • Bank and building societies

  • Savings and credit union accounts

  • Unit trusts, investment trusts and open-ended investment companies

  • Peer-to-peer lending

  • Trust funds

  • Payment protection insurance (PPI)

  • Government or company bonds

  • Life annuity payments

  • Some life insurance contracts

The following does not count towards your savings allowance:

  • Interest from ISAs because they’re tax-free

  • Dividend distributions which are covered separately by the new dividend allowance

  • Reward payments from accounts that are not interest or returns on amounts saved

Other things to be aware of

Joint accounts

Interest earned on joint accounts should be split equally between the two holders. This way, it contributes to each of your respective personal savings allowances.

For example, if the interest accrued on a joint account totalled £500 at the end of the tax year, then £250 would be taken from your allowance and from the second holder’s.

Blind person allowance

The Blind Person’s Allowance is added to your yearly Personal Allowance. So, in addition to the standard £12,500 that you can earn without paying tax, the Blind Person’s Allowance permits an additional £2,450 of tax-free income for 2019/2020.

Marriage allowance

You can claim Married Couple’s Allowance if all of the following apply:

  • You’re married or in a civil partnership

  • You’re living with your spouse or civil partner

  • One of you was born on or before 6th April 1935

The Married Couple Allowance can reduce your tax bill each year if you’re married or in a civil partnership. If you’re eligible, you could see your tax bill cut by between £345-£891.50 a year.

For a specific figure, refer to the Married Couple’s Allowance calculator.

Reclaiming if you have overpaid

You’re eligible to reclaim tax on savings interest if it is below the allowance.

To apply to reclaim tax, it must be within 4 years of the end of the relevant tax year and you will need to fill in an R40 form. It can take up to 6 weeks for this to be processed and for you to receive your tax back.

For more information on paying tax on your savings, speak with our friendly savings team in your nearest Newcastle Building Society branch today or contact us.