Think Short-Term, Think Cash ISAs
The first step in financial planning is to ensure you have an easily accessible cash fund in case of an emergency. Most doctors keep some cash in an instant access account. Below we look at the benefits of using a Cash ISA for this purpose.
The main benefit of an ISA is that any interest earned is always tax-free.
In practice, the interest on doctors' cash savings held outside an ISA is also often tax-free. This is because interest is only taxable if it exceeds the personal savings allowance. This is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. With top savings rates currently at about 1% for both Cash ISAs and non-ISA cash accounts, a doctor would have to have over c.£100,000 in cash before interest added up to more than £1,000 a year.
So is a Cash ISA any better?
The value of tax benefits depends on your personal circumstances. A key advantage of a Cash ISA is that once money is within an ISA it always benefits from favourable tax treatment. So if tax rules such as the personal savings allowance or your circumstances change, the interest on money saved in a Cash ISA would still be tax-free.
ISA allowance - use it or lose it
Because of the tax benefits, only a limited amount can be put in an ISA each tax year. For 2017/18 this is £20,000. Any unused allowance cannot be carried forward. Doctors might therefore considering saving in a Cash ISA instead of a non-ISA cash account to make use of the allowance if it would otherwise be lost.
All money saved in an ISA goes towards building a personal tax shelter. If in future the money held in a Cash ISA is no longer needed as an emergency fund, it can be transferred to a Stocks & Shares ISA and invested to grow free of income tax and capital gains tax. Transfers between Cash and Stocks & Shares ISAs do not count towards the ISA allowance as the money is already within an ISA.
The best rates for Cash ISAs change all the time so doctors should always check before choosing an account. For reference, at the time of writing The Post Office is offering 1.01% AER and Skipton Building Society is offering 1% AER. These top rates include a 12 month bonus, so after a year the rate will drop.
Please be aware that tax rules are subject to change and the value of any benefits depends on individual circumstances. If you would like to discuss ISAs with a financial adviser please contact Richard Higgs CFP FPFS on firstname.lastname@example.org or 0117 966 5699.