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What's the difference between a Cash ISA and a savings account? | Millennial Money

This week we decided to

talk about ISAs. What is an ISA and then Damien is going to talk about

the difference between a savings account and an ISA. So Damien what is an

ISA and please break this down. I love the fact I'm learning so much about

Millennials because you really care about the fact that people notice that

you're in the same clothes. I've had people point this out to me like my wife

and I quite frankly don't care. Before we go on but Lauren got

stopped by one of you viewers saying are you

Lauren for Money to the Masses so there you go and one millennial stopping

another millennial and there were no avocados involved.

What is an ISA?

This is a question that we get asked a lot. An ISA is basically like

a box. It stands for an individual savings account so there are lots of

different types of ISAs which we will come on to. Some that help you buy a house, help

to by ISAs, stocks and shares ISAs, junior ISAs, cash ISAs. For this

video we're going to just focus on cash ISAs. So all you've got to think is that

a cash ISA is like a box, a savings account where if you put money into it

all interest you get on it will be tax-free and it will

be tax-free forever. There's a limit on how much you can

put in a year because there is that tax advantageous status which is £20,000

a year at the moment. So it's basically a box you chuck money into it

the taxman can't get at it. That's what it does. Okay so then what's the

difference if I had a lump sum of money and I wanted to save and bearing in mind

in regards to this particular Cash ISA we're not talking about saving for a

house. It will it'll be the short-term kind of things like I'm saving for a

holiday or saving for a rainy day. So if I had this money that I wanted to

put away and save for someday in the future do I put it in a cash ISA or

in a savings account and what's the difference between the two. It's a

good question because like I said the Cash ISA is a box, a savings account

where any interest you earn on your money is tax-free forever. A savings

account technically the money is taxed, the interest is taxed. So you put your

money in there any interest you get on top of that is subject to income tax.

Years ago that was always the way all of that interest was subject to some form

of income tax but then over the years they changed the rules. So what happened

is the first £1,000 of interest you earn, so that's interest bearing in mind

that interest rates are so low that's quite a big lump of some you're going

to have to have in a savings account to get a £1,000 a year. That first

£1000 if you're a basic rate taxpayer would be free of tax anyway

it's called the savings allowance and if you're a 40% tax payer that's halved

to £500 and if you are a 45% tax payer you don't

get one. Let's be honest you're rich enough. So you can see that the

difference between a savings account and a cash ISA

is that a cash ISA your interest is tax free forever with a savings account it's

tax free to a point and once you start earning more than a £1000 a year

then you are taxed on everything above that. So when you talk about what you're

saving for if it was like a short term maybe a rainy day you might look at a

savings account because you're probably not going to get an amount in your cash

ISA that's big enough to generate more than £1,000 a year. There's

also a quirk and again this is a historical thing but the savings rates

on savings accounts tend to be more generous than they are cash ISAs. So for

you'd go and look which was giving you the best. Was it a cash ISA

out there giving you a really good rate or a savings account and

then pick which one you wanted to go to based on that. The idea of cash ISAs

why they are still relevant, some people thought well with the savings

rate are they even relevant anymore, they are if you're trying to build something

over time. So if you were going to have a lot of money spare over a year I know

the allowances £20,000. Let's dream let's say we put in £20,000 a year and there

are people who do, they will put that into a cash ISA

year on year on year. What that means is that over time there are

people out there who have as much as a million pounds in a cash ISA, basically

this box, this savings account the taxman can't touch and therefore all of that

interest they earn will be free of income tax. Whereas if they put all that

money in a savings account you could see that what would happen is they'd get a certain

amount a year, up to a £,1000 savings allowance of any income tax but

the rest of the interest they earn would be subject to tax. So

it's really the difference is free forever with a cash ISA in terms of

tax-free forever that is or on a savings account there's a limit. But as ever go

to MoneytotheMasses.com where you can find out even more information in

much more detail and as ever if you have any questions or anything you want me to

ask Damien email me lauren@moneytothemasses.com or send me a message on

our social media sites.

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