Low rate ISA's versus high rate Savings a/cs

Elderflower

I've been trying to work out what interest a savings account would have to pay to beat a cash ISA. I'm no maths expert but, working on a savings pot of £1000, the best cash ISA at the moment would pay out £27.50 pa.
So, to get £27.50 from a savings account, the savings rate (x%) equation would look something like this (I think!):
1000 X x% - [20% X (1000 X x%)] = £27.50
Trouble is, I can't work it out.
a) Have I got the equation right and
b) What's the answer!

I wonder whether Martin knows....................?

steveksullivan

I'm no mathematician either - but two minutes trial and error with Excel
gets me 3.44%

((1000 X .0344) X 0.8) = £27.32


(Put the formula in one cell using another cell for the variable interest rate and, as I say, trial and error)

CLAPTON

If X is the interest of the ISA then the formula is for net of tax is

x/0.8

so if the isa interest rate is 2.75% then you need 2.75%/.8 = 3.44% for an 'ordinary' account

THRIFTY_GIRL

Elderflower wrote: »

I've been trying to work out what interest a savings account would have to pay to beat a cash ISA. I'm no maths expert but, working on a savings pot of £1000, the best cash ISA at the moment would pay out £27.50 pa.
So, to get £27.50 from a savings account, the savings rate (x%) equation would look something like this (I think!):
1000 X x% - [20% X (1000 X x%)] = £27.50
Trouble is, I can't work it out.
a) Have I got the equation right and
b) What's the answer!

I wonder whether Martin knows....................?

Assuming you are a basic rate taxpayer, the answer is 3.44%. An easy way to calculate this is as follows:

x% X 100/80 = y%

x is the ISA rate and Y is the rate you would need to achieve if you were taxed.

Remember though, that that if you remove money from an ISA you cannot put it back in later.

HTH

nicko33

Elderflower wrote: »

So, to get £27.50 from a savings account, the savings rate (x%) equation would look something like this (I think!):
1000 X x% - [20% X (1000 X x%)] = £27.50

I think it is right, but it would have been easier to see the answer if you'd written
[100% X (1000 X x%)] - [20% X (1000 X x%)] = £27.50
then
[100%-20%] X (1000 X x%) = £27.50
then
80% X 1000 X x% = £27.50
then
x% = £27.50 / 1000 / 80%
so
x% = 0.034375
and as x% means x/100 multiply both sides by 100
x = 3.4375

Elderflower

Well thanks very much all, especially Nicko33 for explaining the maths. I'd got it to 3.5ish using 'supposing' figures with a conclusion that cash ISA rates and easy access savers are linked by the tax catch. I suppose nobody paying 20% tax would bother with an ISA if there was no advantage. Silly me!
Thanks again everyone - it was a good brain workout.

Lokolo

Just times by 1.25....

nicko33

Lokolo wrote: »

Just times by 1.25....

5/4 for Basic Rate
5/3 for Higher Rate

Lokolo

nicko33 wrote: »

5/4 for Basic Rate
5/3 for Higher Rate

Simples

izzwizz_2

There are other things to take into account besides the interest rate. For example, returns on cash ISAs are not taken into account for Working Tax Credit, whereas savings interest from a taxable account is.

Jonbvn

BTW, there are several cash ISA's which pay more than 2.75%.