what is an isa?

simon_wilkins

hi basically i am confused about isa account why cant you just use a normal bank account and save?what is the diffrence ? thanks

Gorgeous_George

An ISA is tax free.

You can save £3,600 per year in an ISA. So, save £3,600 this year and another next year and so on. If the ISA pays 5%, you get 5% i.e., £180 for £3,600 saved. If you save the same £3,600 in a non-ISA you pay tax on the income e.g., a standard rate taxpayer will pay £36 (20% of £180) and a higher rate taxpayer would pay £72.

If you are a non-taxpayer, it makes no difference so long as you remain a non-taxpayer all the time that you have the savings. Best to use the ISA just in case things change.

GG

simon_wilkins

thanks for the reply would i be write in saying then if i put 3500 in on 5% i would get 180 a year intrest so next year if i put another 3500 in that would make 7000 added plus the 180 intrest from the first year would i still get 180 on the second year or would it be more because there would be 7180 in there so would i get more intrest?

david78

simon_wilkins wrote: »

thanks for the reply would i be write in saying then if i put 3500 in on 5% i would get 180 a year intrest so next year if i put another 3500 in that would make 7000 added plus the 180 intrest from the first year would i still get 180 on the second year or would it be more because there would be 7180 in there so would i get more intrest?

The answers yes, but your maths is wrong.

£3500 at 5% will give you £175 interest in first year (capital becomes £3675).
You can then add another £3500 at the start of the second year. At 5% for the second year your total (£7175) will make £358 interest (ignoring pence). So at the end of year 2 you should have £7533.

In the second year you earn interest on the capital from years 1 and 2 and interest on the interest earned in year 1 (the latter compounding interest is worth about £8).

Incidently your maximum allowance is £3600 (not £3500) in the examples.

Gorgeous_George

I think you cannot have more than £3,600 in any one ISA therefore, in your example, only £100 of the interest can be kept in the ISA.

GG

withnell

Gorgeous_George wrote: »

I think you cannot have more than £3,600 in any one ISA therefore, in your example, only £100 of the interest can be kept in the ISA.

GG

ISAs can be for any amount, just there is a maximum cash subscription of 3600 per tax year (6April -> 5 April). Interest does not count as subscription.