On its 25th birthday, the Individual Savings Account (Isa) has truly come of age — and it is having a party no saver should miss.

Interest rates on cash Isas now beat regular savings accounts with market-leading deals, and the tax advantages of these accounts have never been more important.

Add to that a shake-up in Isa rules which gives you more flexibility and you’ll find it has never been so easy to grow your wealth with an Isa.

After years of rock-bottom rates, cash Isas had earned themselves a reputation as the poorer cousin of ordinary savings accounts — but they have come a long way in recent years.

Two years ago, there was a 0.6 percentage point gap between the best ordinary fixed-rate savings account and an equivalent Isa. 

Tax-free: Interest rates on cash Isas now beat regular savings accounts with market-leading deals, and the tax advantages of these accounts have never been more important

Tax-free: Interest rates on cash Isas now beat regular savings accounts with market-leading deals, and the tax advantages of these accounts have never been more important

Tax-free: Interest rates on cash Isas now beat regular savings accounts with market-leading deals, and the tax advantages of these accounts have never been more important

By last year, that gap had shrunk, but ordinary accounts were still 0.28 percentage points ahead of Isas.

But in recent months, the difference is almost non-existent at 0.05 percentage points on fixed-rate deals and, in some cases, the trusty Isa has leapfrogged similar High Street accounts.

The average interest rate on easy-access Isas was 3.37 per cent on Monday, outstripping the average 3.16 per cent on easy-access accounts, according to data comparison group MoneyfactsCompare.

Savers can now bag a market-leading 5.11 per cent with Moneybox’s easy-access cash Isa. 

This is a whisker more than you can earn in a standard savings account, where the top deal is a 5.1 per cent account with Cynergy Bank.

But the biggest selling point that makes the Isa more valuable yet is that, unlike with other savings accounts, no matter how much money you stash away (subject to annual allowances), you will never have to pay tax on your interest, protecting every penny from the taxman.

In a world of higher rates, this counts for far more. Around 2.73 million savers are expected to pay tax on interest earned in ordinary savings accounts this year, up from 800,000 just two years ago.

Basic-rate taxpayers must pay tax on any interest they earn from their savings above £1,000 a year. 

Higher-rate taxpayers can earn just £500 in interest before they start to pay tax, and additional-rate taxpayers pay tax on all of their interest.

And the good news is that, from April, a major change in Isa rules announced by Chancellor Jeremy Hunt during his Autumn Statement, will mean that savers can, for the first time, chase the best deals without being penalised.

From the new tax year, savers will be able to hold as many Isas as they like without being hit with a tax penalty. Currently, investors can only open and pay money into one of each type of Isa every year.

This means they can only save into one cash Isa or one stocks and shares Isa per tax year. 

Under the current rules, anyone who opens more than one type of cash Isa can be charged tax on interest they earn and will have their second account shut down. This means they risk missing out on unused tax allowances.

Tax shelter: Around 2.73 million savers are expected to pay tax on interest earned in ordinary savings accounts this year, up from 800,000 just two years ago

Tax shelter: Around 2.73 million savers are expected to pay tax on interest earned in ordinary savings accounts this year, up from 800,000 just two years ago

Tax shelter: Around 2.73 million savers are expected to pay tax on interest earned in ordinary savings accounts this year, up from 800,000 just two years ago

As of next month, this will no longer be the case, which means savers will be able to shop around more freely and bag the best rates without losing their tax-free allowance. 

These tax advantages are just as vital — if not more — for savers who invest in stocks and shares.

Next month, the taxman is further tightening its grip on the profits made by investors.

From April 6, the annual dividend allowance will be halved to £500. The cut will reduce the amount that you can earn in dividends without paying tax to just a tenth of what it was as recently as 2018.

It was cut from £5,000 to £2,000 in 2018, and halved to £1,000 in 2023. More than 1.1 million more people will find themselves paying dividend tax as a result, HMRC estimates.

Likewise, the capital gains tax allowance will be slashed from £6,000 to just £3,000, less than a quarter of the £12,300 allowance investors enjoyed in 2022.

This means that squirrelling your savings into a tax-free wrapper makes more sense than ever.

C alculations by stockbroker Interactive Investor show that a higher earner could have saved up to £9,000 in capital gains tax since 1999 — when Isas were launched — if they had invested their entire allowance into the account each year, versus if they had bought stocks and shares in a taxable account.

However, tax savings will balloon in the coming years as the Government continues to slash investors’ allowances.

A higher-rate taxpayer who maxes out their allowance in April from the start of the new tax year could save £18,534 in capital gains tax over ten years if no withdrawals are made, assuming allowances remain unchanged over the period.

Myron Jobson, of Interactive Investor, says: ‘While few have been in the fortunate position to make full use of the annual allowance every tax year, many have benefited from not insignificant tax savings when they have sold their investments.

‘The significant cut to tax allowances means that those with more modest portfolios held outside a tax wrapper face a growing tax burden as their investments grow.’

A new British Isa is currently in the works and it will give savers yet more leeway to shelter their cash from taxes.

Earlier this month, Mr Hunt announced that a new UK Isa would soon be created to allow investors to pour an extra £5,000 into the stock market beyond the current £20,000 allowance each year, so long as the money is put into UK-listed assets.

The Government has yet to confirm exactly when the new patriotic savings account will launch. But recent political focus on these accounts has given Isas a renewed impetus that savers can no longer afford to ignore.

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Check the best cash Isa rates in our savings tables 

This post first appeared on Dailymail.co.uk

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