Rebel without a Nisa: Tax-free saving for young people

George Dean Osborne
Why did you shoot those Isas, John?
"Most savings interest is taxed at 20% - you may not even notice this as it's deducted before the interest is credited to your account, but it's hitting you in the pocket"
  • | by Sean Davies

With a new £15,000 tax-free limit, it could be time to consider using a Nisa as your day-to-day, easy-access savings account. Here's what you need to think about…

They're the classic signs of revolutionary youth that we all recognise; the jeans, the leather, sex, drugs, rock'n'roll, and the easy-access savings account.

But, as is the way of life, the next generation will come along and shake the tree, kick over tables, burn the terms and conditions.

That classic rebel-rouser George Osborne lit the touch paper in London in March, and come July his message rocked the nation.

No more Individual Savings Accounts (Isas) for this daddy-o. The New Individual Savings Account (Nisa) was here and the youth of the land would never look at their savings and investment options in the same way again.

What's changed?

It's fair to say that Isas never quite caught the zeitgeist of youth.

They were traditionally seen as long-term savings options for older, wealthier folk who would then enjoy tax-free benefits into their twilight years.

The maximum annual amount that could be put into a cash Isa was always below £6,000.

Wealthier savers would rush to squirrel away their full tax-free allowance at the start of every financial year and would be urged not to withdraw this money as they'd then lose that element of their tax-free benefits for life.

On 1 July, though, the annual tax-free savings limit was raised to £15,000.

Given that it's only a small minority of the population who will save such an amount in a year, it's worth thinking about whether using a Nisa as an instant-access savings account is worth your while.

Easy-access accounts without tax

The essential thing to remember about a cash Nisa is that it can be opened and run in exactly the same way as a standard savings account - you just won't pay any tax on the interest you earn.

Remember that, if you're a standard-rate tax-payer, most savings interest is taxed at 20% - you may not even notice this as it's deducted before the interest is credited to your account, but it's hitting you in the pocket.

Given the new £15,000 Nisa limit, if you're the sort of saver who has a small surplus in an easy-access account at the end of the month - or even if you run a surplus for part of the month before withdrawing the funds to use elsewhere - it's worth considering an easy-access Nisa.

What are the downsides?

Remember that £15,000 is the maximum you can pay into any sort of Nisa in this tax year (which runs from 6 April to 5 April), and you can open a maximum of one cash Nisa and one stocks and shares Nisa in any given tax year.

As a case study, let's say you're using a cash Nisa as an everyday savings account into which you put £1,000 from your wages every pay day.

In the following weeks you might withdraw £950 from that account to meet day-to-day expenses and monthly bills, leaving you with a surplus of £50 in the account every month.

If you'd started in April, as the end of the tax year approaches this could leave you with £600 (£50 x 12) in the account, plus any accrued interest.

But remember that you'll have used £12,000 of your annual Nisa allowance (12 payments of £1,000), meaning that you can only save and/or invest a further £3,000 into a Nisa in that tax year.

Also remember, though, that come 6 April you'll have a new Nisa allowance. As Isa/Nisa allowances have never gone down historically, it's possible that the allowance for 2015-16 will be more than £15,000.

What other easy-access options are there?

While cash Nisas should be comparable with standard instant-access accounts, it's possible that non-Nisa products could offer a better rate.

Shop around and see what accounts are on the market, remembering to factor in the tax-free benefits that come with Nisas.

Traditional savings advice has been somewhat muddied in recent years by the rise of interest-paying current accounts.

These products are offering some of the highest 'savings' rates on the market, but be aware that they'll be subject to tax and to terms and conditions - for example, interest may only be paid on current account balances up to a certain amount.

Other Nisa options

There are about as many cash Nisa options as there are standard savings account choices.

You could, for example, opt for a notice-account Nisa or a regular-saver account rather than an easy-access choice.

Remember that (subject to your provider's terms and conditions) you can transfer your Nisa at any time, either into a more appropriate cash Nisa, or even into a stocks and shares Nisa.

So if you're just dipping your toe into the savings market for the first time, consider making it a Nisa experience.

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