Should I open an 8% savings account using a R85 or use an ISA?

chrismills6989

I’m currently in full time education and only have a part time job. I want to open a savings account. Have I got this right by saying, id be better to open an 8% account and use a R85 because I don’t earn enough to get taxed. Instead of opening an ISA?

Hungerdunger

In the short term you are probably right. But one thing you should consider is this: if you are going to be in full time education for, say, 3 years, then you could put away up to £10,800 in an ISA. Although it might initially be earning you a lower rate of interest, the interest will always be tax-free, even when you start to pay tax, whereas if you put it into a better non-ISA account now, the interest will eventually attract tax at 20%, or if you get a well-paid job, at 40%.

Milarky

ISAs won't pay as much as comparable (taxable) accounts, however - as the OP's example highlights. I always assume that an ISA rate is only c. 90% of the possible gross

For instance say you can get 6.6% 'gross' - and 6% 'tax free' - typically from the same institution.

6.6% is 5.28 to a BR taxpayer - so the effective 'relief' is only '6%' -> 5.28% or 12% (rather than the taxpayer's 20% liability) - Just think of ISAs as giving just about £1 extra interest in every £8 to decide which it becomes worth it (and 'how much' this could add up to over several years)

The picture is decidedly better for HR taxpayers however
6.6% is 3.96 to a HR taxpayer - so the effective 'relief' is '6%' -> 3.96% or around 34% - £1 extra interest in every £3....

The difference goes the other way for a 'lower' rate (10%) taxpayer and a non-taxpayer
6.6% is 5.94% to a LR taxpayer - so the effective 'relief' is 'nil'. ISAs make no difference in the £2300 LR band itself...

6.6% is 6.6% to a HR taxpayer - so the effective 'relief' is '-10%' . ISAs are about as 'bad' for non taxpayers as they are 'good' for BR taxpayers (Eg Working and non-working members in the same household - both with the same cash ISAs..

Perhaps the OP could resolve to save a regular amount into an ISA rather than go for the maximum per annum. Slightly less interest is earned but the inclination to spend is also reduced because this becomes a 'budget' item. Anyone who can't afford to save £300 per month shouldn't try to but if they can manage it the extra could go into those attractively headlined taxable savings accounts - couldn't they?

tinkerbel

You could always use the 8% account then at the end of march put it in an ISA? Then if you ever become a high rate tax payer you'll be grateful!

luckylizard

you'd be better off using your ISA allowance. it's tax-free for life, however much you earn. you won't be able to use an R85 once you start earning over 6k a year, which presumably you plan on doing.

Jonbvn

If the 8% a account is with HSBC don't do it! You have to pay a fee every month, which is more than the interest you earn.

jimbow25

I agree with the advice of post #2- really the best option depends what you current situation is and how long you might expect to be saving the money for.

If you're saving up for a holiday next year and you'll be spending what you've saved then, then the 8%/R85 option will pay you most interest.

If you're looking to save over a few years, though, you need to consider that you only get each year's ISA allowance once and so it's probably better for the long term to have that money inside an ISA. Martin's guides recommend you generally use your ISA allowance first, I guess with this in mind.

I moved about £800 out of an 8% regular saver account last year (the former 2 year Lloyds TSB one), way before its term ended, to use up my ISA allowance, because I thought I would probably use this year's allowance in full as well and I wanted to have as much in an ISA for the long term as possible.