Savings account Vs ISA

gxc

Hi all,

I have a simple enougth question to ask, will I be better off with a regular savings account, or an ISA? At the moment I have started saving in a regular account (halifax web saver extra) but I'm considering switching to an ISA instead, and im not sure about the pro's and cons. If I do switch to an ISA it will be the Halifax cash isa, which for the first 12 months pays out 2.8% + 0.2% because I hold a reward current account and pay £1000 into it every month.

The backstory, my partner and I recently found out we are having a baby, so I want to start saving most of my "disposable" income so that we have a small sum of money to turn to. I have no debt to pay off, other then a £3000 student overdraft (I dont pay interest ont his, so I have maxed it out and transfered all the funds into my savings, that doesnt add up to much tho). I am saving a minimum £40 / week via standing order into the savings, and budgeting heavily, and intend to save around 75% of my remaining money at the end of each month after all bills and living expenses are paid, which will probably be around £300 meaning £460 saved each month.

What are the main differences between the savings account and the ISA, and thus would I be better opening an ISA and closing the savings account?

Thanks

Lokolo

An ISA is a savings account. It's just "specialised". If you are a taxpayer (assuming you are), then you will have 20% (40% for higher rate tax payer) of your interest taken away.

An ISA is a wrapper for your savings so that the interest isn't taxed. However, there are limits. You can only deposit £5,100 each tax year (per person). Anything you withdraw doesn't mean you can put back in. The limit is on deposits. So if you deposit £5,100, and withdraw £500. You can't put anymore money in, as you have deposited the total allowance.

You should try and use your ISA allowance as much as you can as you aren't taxed on the interest, which usually means you can get more interest.

mars_2

Simple answer asuming you are a tax payer is on your regular savings account you will pay interest when you wont pay interest on your ISA.

The maximum in an ISA is currently 5100 but you could also put a similar ammount in your partner's name.

Baldur

gxc wrote: »

What are the main differences between the savings account and the ISA, and thus would I be better opening an ISA and closing the savings account?

A Cash ISA is basically just a savings account but with interest paid gross (tax free), whereas interest on a non-ISA would be taxable at your prevailing rate.

You can only subscribe (pay new money into) to one Cash ISA per tax year (April 6th to April 5th) up to a maximum of £5,100 currently.

Rob_192

As others have said, assuming you are a tax payer, you need to be comparing the gross rate in an Isa with a net reate in a savings account.

It also depends how long you are looking at saving for - Isa's come into their own when you're looking longer term, where even the smallest difference in interest rates can make a significant difference with the benifit of compounding - also remember, if you're looking longer term, you may start as basic rate tax payers but end up paying higher rate and you will find that having saved up a sum inside an Isa will then be really worthwhile.

R

gxc

Wow, this forum moves fast! Thanks a lot for the advice, I think I will be better off moving my money into the ISA, I dont think independantly I will hit the limit this year. Just one question about how the interest works, If I say, paid in £4000 between now and April, and then removed £2000 would I gain interest ont he average balance over the year, or the final balance?

MoneyStudent

gxc wrote: »

Wow, this forum moves fast! Thanks a lot for the advice, I think I will be better off moving my money into the ISA, I dont think independantly I will hit the limit this year. Just one question about how the interest works, If I say, paid in £4000 between now and April, and then removed £2000 would I gain interest ont he average balance over the year, or the final balance?

Interest is calculated daily. But usually added monthly/yearly.

snowqueen555

Do you have enough capital to clear that overdraft as you said you moved the money from that into a savings account? Just clear that O/D, even if it is interest free

Lokolo

gxc wrote: »

Wow, this forum moves fast! Thanks a lot for the advice, I think I will be better off moving my money into the ISA, I dont think independantly I will hit the limit this year. Just one question about how the interest works, If I say, paid in £4000 between now and April, and then removed £2000 would I gain interest on the average balance over the year, or the final balance?

This ^^

snowqueen555 wrote: »

Do you have enough capital to clear that overdraft as you said you moved the money from that into a savings account? Just clear that O/D, even if it is interest free

This isn't in the spirit of MSE

OP, keep the OD as long as it's free.

Fedz

Lokolo wrote: »

This isn't in the spirit of MSE

OP, keep the OD as long as it's free.

This is the one. Save 1st as you get interest on every penny but, the OD ain't costing you nothing so pretty pointless paying it & losing interest on possible savings amounts.

If you was paying interest on the OD then yes that 1st as it's costing more than you could gain from saving

gxc

Indeed the OD is free so I may as well save with it, the plan is to always keep hold of the capital to pay it off, that way when I get the inevitable letter saying "We are lowering your OD to £2000 and you will have to pay us interest ont he outstanding balance" I will be able to pay it off immediately, and keep saving the rest.