ISA vs Non ISA Interest Rate Calculation

Jakestar

Hi all,

This has been bugging me a while so I thought I'd ask. For a basic rate tax payer, how do you calulate the interest percentage after tax of a regular savings account? (i.e 3% ISA and 4.5% non-ISA, what would the after tax interest rate for the non-ISA be?).

This is so I can compare the interest rate between ISA and non ISA savings accounts.

Also, in general, will the top rate ISA at a point in time provide more interest than the top rate non-ISA (assuming a bax rate taxpayer, money saved for 1 year).

Its just that I swear I've seen non-isa saving accounts (maybe not currenly, but recently) offering much better interest rates that even after the 20% tax taken off would be better than the ISA equivelent?

Maybe Im being a bit dense on this one, but I cannot seem to figure it out!

Cheers

xrjtg

Basic rate tax is 20%, so multiply the interest rate by 0.8 to get the effective rate after tax.

Yes, some accounts pay more than the best ISAs even after deducting income tax. The question here is whether this will continue to be the case, or are you better sheltering your cash now in the hope that things change in the future?

claire111

Sometimes regardless of the rate, it is beneficial to have savings in an ISA that you don't have to detail on your tax return and that don't disqualify you when applying for certain social security benefits....

This could amount to a tidy sum for someone who has been contributing since the beginning.

Interest isn't everything

jennifernil

Which benefits are not affected by having ISA savings?

ffacoffipawb

jennifernil wrote: »

Which benefits are not affected by having ISA savings?

Child tax credits

Child benefit in 2 years time if higher rate taxpayers don't get it and savings interest pushes you into higher rate tax.

ultrawomble

As I understand it, the interest gained from tax-free products (ISAs, NS&I etc.) is not included as income for CTC purposes.

http://www.hmrc.gov.uk/taxcredits/start/claiming/income-hours/other-income.htm

Loughton_Monkey

Jakestar wrote: »

Its just that I swear I've seen non-isa saving accounts (maybe not currenly, but recently) offering much better interest rates that even after the 20% tax taken off would be better than the ISA equivelent?

Maybe Im being a bit dense on this one, but I cannot seem to figure it out!

You have to remember that the current situation on savings (roughly ever since we got the 0.5% Base Rate) is a little bit false.

As a general rule, savings institutions offer similar rates whether under ISA wrapper or not. I expect this to be the case again before too long. In the meantime, however, we do have several anomolies such as 4% with a Vantage Current Account, 5% in a Santander Current Account, and several generous 'Regular Savers'.

So it follows that if you want to save for a year and take it out to spend, then if the gross rate, less tax, is more than the ISA rate, then use it.

But if you want to save for a longer term then to 'suffer' a small loss of interest in the first year is a 'pimple on an elephant's rear' compared with the huge tax savings you will enjoy over the next 20 or 30 years by having 'trapped' it inside the ISA. Every 5th April, your opportinity to lock away £5,100 is lost irretrievably.

It's up to you.