First Direct Offset equivalent Savings rate

Daniel_B

Hi guys,
have added a new field to my spreadsheet, and thought I would workout what the equivalent rate would need to be, if it were a normal savings account, and the Taxman took his cut.

Have a look at these stats and see if it makes sense:

I divide the interest saved per month by the offset value that month, and multiply by 100 (If I didn't multiply by 100, it would tell me how much each £1 is saving me) - this gives me the amount in pounds each £100 off offset is saving me.

ie £0.49 per £100

Then I multiply that by 12 (months), divide the result by 100, and then to get the rate I would need if I were paying Tax, I multiply it by 120%

Is that correct?

The figures seem to add up, the best equivalent rate I get is 7.07%, and at the moment with the lower rate it is running at around 6.6%.

Agreed, I could have a lower rate on my mortgage (5.5%) but I think the above stats (if they are correct?!) support the offset approach.

What do people think?

I'm not sure my 120% formula is right, in fact I don't think it is :mad:
Cos they 'only' take 20% of the interest don't they, so presumably i do need to multiply it by 100 & something percent, but what percent??

Dan

silvercar

If you take your offset rate and divide it by 0.8 you'll get the gross rate you need to get on savings to equate to the interest you get on your offset account.

eg offset rate of 5.5, so 5.5 divided by 0.8 = 6.875. So if you found a savings account paying 6.875 you'd pay 20% tax ie tax at the rate of 6.875 x 0.2 = 1.375 leaving you with net interest of 5.5%.

[of course if you pay tax at 40% you need to find a gross savings rate of 5.5 divided by 0.6 = 9.167]

Daniel_B

Thanks Silvercar!

so somehow, in my convuluted workings out, it does appear I have made the correct calculation!

Possibly in not the neatest quickest way, but it gets there eventually......

I wanted to do it on a month by month basis, as it does seem to fluctuate to some degree.

Thanks

Dan

silvercar

Monthly rates can be found dividing by 12.

So for a basic rate tax payer, 5.5% divide by 12 = 0.458333% equiv to a gross account rate of 6.875 divide by 12 = 0.57291666%.
For a higher rate tax payer equiv to 9.1677 divide by 12 = 0.7638889%