ISAs, student loan and a cunning (or not-so-cunning) plan.

RedBooties_2

Hi folks,

I've read the ISA articles and many of the threads, but I still have a question (apologies if I'm covering old ground here). If I open a cash mini ISA and put in £3000 before the end of this tax year, how would that affect my income tax - Roughly, I'm currently earning £14400/year (due for a raise soon, though ), and I pay my tax with a tax return. Would the initial amount used in the calculations for tax then be £11400, or is the "non-taxable" part of an ISA just the interest gained?

To elaborate on this, I have just enough money in my current account to pay my income tax for this year. I also have a £12000 student loan. To prevent the interest for the loan accumulating and pretty much wiping out what I pay off (£200+/year, obliged to pay roughly £350/year via tax return), my family agreed to sub me the cash (which is also, as of today, sitting in my account), so I can clear the loan and pay them back without having to pay interest charges.

Here's where it gets interesting: I'd like to make paying the money back work for me. Or rather, I'd like to make it work for my family. I figured I could put the money that I could put £250/month of what I would pay back to the family into an ISA (perhaps the Halifax regular savers ISA, with the higher 7.odd interest rate?), where - I presume, though could be wrong - it would generate interest (which I would pass onto the family, giving them a nice bonus) *and* reduce my income tax tax value. (This wouldn't necessarily have to be withdrawable on demand).

This is for the following tax year, however. For the remainder of this tax year, I was thinking of doing what I said above and putting £3000 of the income tax I have sitting in my account (which wouldn't be due until Jan 31 2007). Would this reduce the amount of income tax I would have to pay significantly enough to be worth doing? I'd have to be able to withdraw come Jan 2007 too (if I can't 'get all of it back' (for lack of a better expression) in time) so as to pay the tax man. Lovely chap that he is.

Any feedback regarding flaws in my cunning plans is very welcome - any advice on what I should be doing; corrections to my spotty knowledge on the subject; and so on. I can provide further details of my expenses if it helps (I don't live a complicated life and don't cost much to run ).

Many thanks in advance.

<edit>
Oh, forgot to ask how cash in an ISA would be declared on a tax return?
</edit>

grumbler

Welcome to boards.

I struggled to understand all your plans, so I want to make just a couple of notes:
1. Amount saved into ISA does not affect your taxable income. It is only interest generated by ISA that is tax-free.
2. Halifax regular saving account (7%) is not an ISA, although you can use it to save £250 p.m. and then, when it matures, move £3000 lump sum into ISA.
3. AFAIK you don't declare either ISA (saved amount) or ISA interest in the tax return. You must declare only taxable interest.

RedBooties_2

grumbler wrote:

Welcome to boards.
I struggled to understand all your plans, so I want to make just a couple of

Thanks. Sorry about the verbosity of my post. That'll teach me to write a post while flitting between lots of things in order to meet a deadline.

grumbler wrote:

1. Amount saved into ISA does not affect your taxable income. It is only interest generated by ISA that is tax-free.
2. Halifax regular saving account (7%) is not an ISA, although you can use it to save £250 p.m. and then, when it matures, move £3000 lump sum into ISA.
3. AFAIK you don't declare either ISA (saved amount) or ISA interest in the tax return. You must declare only taxable interest.

Ah, that's clarified things somewhat. It's amazing how you can hear explanation after explanation and it just seems to get more and more obfuscated, and then someone comes along and explains it nice and concisely. I'd probably be better off waiting until April and then opening an ISA in which to deposit the money I'm repaying.

Thanks for the reply. Much appreciated.