Previously, we covered ISA allowances for this tax year and next. We also explained why it might be better to hold cash in ordinary savings accounts and fixed-term deposits, rather than in their ISA equivalents.
Put simply, for most basic and higher rate tax payers, your personal savings allowance (more of which later) will ensure that you receive interest tax-free, just like an ISA. The rates on ordinary savings accounts and fixed-term deposits are also better.
Not using your ISA allowance for cash savings leaves it available to use for stocks-and-shares investments.
Although the main ISA allowance is unchanged for 2020/21, junior ISA allowances rose from £4,368 to £9,000 on 6th April 2020.
If their income, including interest from cash deposits and dividends from shareholdings, falls within their personal allowance, they won’t normally pay any income tax.
Therefore, just like adults using their personal allowance or personal savings allowance, children can also earn tax-free interest on ordinary savings accounts.
If the rate of interest on the ordinary savings account is better than the JISA, that may be an alternative consideration to look into.
Do JISAs have any advantages?
There are three main reasons for choosing a JISA rather than an ordinary savings account:
- Any money gifted by parents is only allowed to earn interest of £100 a year tax-free, with any excess taxed at the parents’ tax rate. If the money has been gifted, then a JISA allows all interest to be received tax free, even if the interest is more than £100 and the money came from parents. According to the rules, if the child’s money has come from other sources, such as grandparents, then the money is regarded as the child’s, and they can earn tax-free interest using their own tax allowances.
- JISAs are locked away to age 18, when they are converted to ordinary adult ISAs - the money will stay in the account up until the time when the account is converted.
- If the rate of interest on a JISA is better than an ordinary savings account, then the JISA may be a better option. However, you should be aware that the interest rate of a Junior cash ISA is subject to change - an enticing rate upon opening the account could change, in either direction.
Remember, the value of investments can fall as well as rise and you could get back less than invested.