Is an ISA good for a non-taxpayer?

twr18

I'm a student non-taxpayer because I dont earn enough. Would it still be beneficial for my to open an ISA? Despite be being able to get higher rates of interest in my regular saver account (Halifax 7%)?

I will start paying tax in 2009 in my placement year.

zag2me

Yes it is very good for your situation too, especially as you will become a tax payer at some point. You only get a 3k allowance each year, if you dont use it, you loose it forever.

Its only worth opening an isa, if you are going to put money into it however, otherwise its pointless.

twr18

Do you mean...

If I started an ISA now I would have £9,000 worth of tax free savings available to me, as it grows by £3,000 a year, and if I started one in 2009 I would only have £3,000 because its my first year?

Paul_Herring

twr18 wrote:

If I started an ISA now I would have £9,000 worth of tax free savings available to me, as it grows by £3,000 a year, and if I started one in 2009 I would only have £3,000 because its my first year?

It will also grow because of the (compunded) interest, but yes. You cannot use previous years allowances in future years if you didn't put any money in.

twr18

I still dont understand the benefits of an ISA if I dont pay tax.

7% (regular saver) is higher than 5% (ISA) therefore I will get more interest from a regular saver. Simple as. Maybe when I pay tax the nett interest on a regular saver will be lower than an ISA, but until then a regular saver is more beneficial.

Does the amount you can pay into an ISA grow each year?
for example
Year 1: I pay in £3,000, total balance £3,000
Year 2: I pay in another £3,000, total balance £6,000
Year 3: I pay in another £3,000, total balance £9,000

Or is an ISA a fixed 12 month saver. So at the end of the 12 months you get your £3,000 back plus interest, and its up to you to start a new one or not. If so then compound interest wont work will it? Assuming interest is paid annually, and you get the capital plus interest back each year then there is nothing to compound on?

meanmachine_2

Sorry, but aren't these regular saver accounts tied to a current account? And isn't it a clause that you have to pay your salary into the current account each month?

Is there a regular saver that doesn't have this current account strong attached?

meanmachine_2

twr18 wrote:

Does the amount you can pay into an ISA grow each year?
for example
Year 1: I pay in £3,000, total balance £3,000
Year 2: I pay in another £3,000, total balance £6,000
Year 3: I pay in another £3,000, total balance £9,000

Year 1 £3K
Year 2 6K + interest = £6150
Year 3 £6150 + £3K + interest = £9400 etc etc

twr18

meanmachine wrote:

Sorry, but aren't these regular saver accounts tied to a current account? And isn't it a clause that you have to pay your salary into the current account each month?

Is there a regular saver that doesn't have this current account strong attached?

Yes, you have to have a current account. There isnt one that I know of that doesnt have this. You have to pay your salary into somewhere though! Chances are your current bank will offer a regular saver account. If not move to Halifax as they offer a good interest rate on their current account as well.

twr18

meanmachine wrote:

Year 1 £3K
Year 2 6K + interest = £6150
Year 3 £6150 + £3K + interest = £9400 etc etc

I see. So in conclusion although the interest rate is lower than a regular saver account, the advantage of me opening an ISA as soon as possible is that it will let me effectively have a larger tax-free savings account when I do start paying tax, than if I opened one then.

So the question is for me do I want to maximise the interest I earn now, or pay less tax on my overall interest when I do start paying tax.

Sillychuckie

Precisely... a regular saver will net you more money in the short term (the interest rate being higher), but an ISA is about building your tax free savings portfolio over a longer period and is far better for longer term investment.
Its "use it, or lose it" with the allowance each year, so in 3 years time when you graduate and probably start paying tax, it would have been a wiser move to use the ISA. It keeps most of your cash away from the taxman.
If you still have more money available after using the allowance, regular savers are perfect.

If you plan on saving for more than the year, go for an ISA. If the extra £20-30 you might get on the extra few % means that much to you, go for a regular saver. Personally, I'd go (and have gone) with the ISA's before using any other form of savings acct.

twr18

Trouble is I only have about £4,000 to save, and im not likely to have much more while im at Uni.

If I can only fill one ISA between now and 2009 then there is no point in me opening one now. I might as well make the most of a regular saver and open an ISA when I can fill more than one.