As the new tax year dawns, where is your money going?
Who do you love more, the taxman or your own family?
It's a question often quoted around this time of year, as the current tax year draws to a close at midnight tomorrow, and we wake on Wednesday with a new set of tax allowances for 2016/17 – not least among them being the allowance for saving into our Isas, which this year is again set at £15,240.
Before we look at the latest developments on the Isa scene, let's round up the main changes that the last year has brought.
We have seen the arrival of what's being called the ‘radically flexible' Isa, with improved rules over how you use up your annual allowance.
Here's the scenario: you have invested £1,000 into your Isa, but then, sensing that cash is available, the car packs up (as they tend to do) and you need to take £500 of that back out for repairs.
Prior to the radically flexible Isa - tough, but that £500 still counted against your annual Isa allowance.
This meant that, following your miserable motoring misfortune, when you managed to pay that £500 back into your Isa a few months later, you had used up £1,500, and not £1,000, of your annual allowance.
Thanks to the ‘radically flexible' Isa, that second bite is not taken out of your allowance. You can now put the £500 back in and, provided you do it during the same tax year, you will still have used up only £1,000 of your annual allowance.
Another restriction that has been scrapped is the requirement that only half of your annual Isa allowance could be saved into cash. Now, you can save all of your allowance in cash, in stocks and shares, or in any combination of the two.
Which brings us to what the computer bods might call ‘an Isas FAQ' – a ‘frequently asked question'.
“What is the advantage of saving in the stocks and shares Isa, as opposed to saving in cash?”
History shows that for long-term saving, stocks and shares generally show a better return than cash. They aren't regarded as a short-term option, though. Stocks and shares are more suitable if you can leave your cash in for 10 years or even longer, but in general and in the long-term they would appear to be hard to beat.
So what are the best deals going at the moment in Isas? Generally speaking, you'll get a better rate in a fixed-rate Isa - but as the man said ‘there ain't no such thing as a free lunch'.
With this better rate comes the condition that you leave your cash in for a certain term, possibly incurring a penalty if you have to dip into your money early. The best such deal at the moment may be the United Bank 5-year fix offering 2.33 per cent, but you lose 365 days of interest for an early withdrawal.
If you want easy access to your cash, on the other hand, then interest rates are generally not quite as good as with the fixed-rate option. Coventry Building Society's Isa is currently offering a decent 1.44 per cent.
At this point, we must digress from Isa savings for a moment, and talk about savings in other types of bank account, as something new has come along there which shows them in a new light.
This is because, as the Chancellor George Osborne recently reminded us, the new Personal Savings Allowance becomes available from Wednesday.
The government is claiming that with this new allowance, 95 per cent of savers in the country will pay no tax on bank account savings.
Here's how it works. If you are a basic rate taxpayer, paying tax at 20 per cent, then from Wednesday,the first £1,000 of your savings income will be tax-free. If you are a higher earner, paying tax at 40 per cent, you will have your first £500 tax-free.
Remember, we're not talking about Isas here - this applies to savings in ordinary bank and building society accounts, where savings interest has until now been taxable at your marginal rate (the rate you pay on your salary).
This is certain to change the way we look at saving in ordinary bank accounts.
More flexible Isas - and more attractive returns on your bank account cash.
The whole issue of saving is about to become a lot less … taxing!
:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005