Student Savings Question

ISA_Aspirant

I'm currently a student and do not have a job of any description. My father has put 25k or so over the years in premium bonds for me. Now that I am older, I've been looking at effective ways to save money. As it seems that the higher-interest savings accounts can offer better returns than premium bonds, I am keen to switch the money over.

However, my understanding of how tax works is a little hazy. If I go ahead and deposit 25k in a fixed account set at 7.1%, will I have £26,775.00 in that account after 1 year or is that amount subject to tax? What would you recommend I do with the 25k?

ps. I have already spent my max ISA allowance for this year.

Masomnia

After a year you would indeed have £26,775.

Whether or not you pay tax on that would depend on how much you earn in the tax year that the interest is paid. So if you deposit the money now, you will get the interest in a year's time. If you graduate in July and begin work then you will probably earn over the threshold for tax in that tax year, and therefore will pay tax on the interest, and recieve £1420 in interest.

The threshold is £6,035 for basic rate tax. If you earn that or more in a year then you pay 20% of your interest in tax which is deducted when it is paid to you. If you won't earn over that, then you need to fill in an R85 form to make sure that you get paid interest without tax taken off.

If you're absolutely sure that you will not need the money, then fixing for a year at that rate is a very very good idea in my book.

colin79666

You would only pay tax if you earned over the personal allowance limit - you wouldn't hit that on interest from 25k - probably. It is assumed you have to pay tax - there is a form you can fill in to say you should be paid gross interest (the bank can help you).

ISA_Aspirant

Thanks for your help guys. I will be graduating next year but will continue to study for a further year before I begin my job. I'll be filling in one of those R85 forms!