Help needed for a newbie!

Chadiii

Currently I have between £15-£20k worth of savings sitting in an account with a poor interest rate (1.5%). I would like to put this either into an ISA or a higher rate savings a/c for 6-12 months, preferably with the possibility of being able to reach the money once or twice if need be. I am not interested in investments or Premium Bonds.

I have a regular job and have never filed a personal tax return. According to what I have read on the HM Inland Revenue website I don't need to file a tax return as I won't earn over £10k income from savings. Is this true? If so, I don't understand the point of an ISA. I don't have a mortgage, any debts, and I do not plan to put any more money aside every month.


I'd be grateful if anyone could give me some advice and answer a few of my questions:

- If I need to access money during the course of the year will I receive any interest on an ISA?
- What is the advantage of opening an ISA as opposed to a savings a/c if I won't need to pay tax on it anyway?
- What "small print" should I be wary of in ISA's or savings a/c's?
- Should I consider spitting the amount and putting £5-£10k away in a longer savings a/c to gain a higher interest rate?

Many thanks!

Lokolo

1) Yes, same as any savings account
2) You will pay tax on the interest if you are a tax payer (you say you have a regular job, so I assume you are a tax payer) unless the money is in an ISA. Where you got £10k from I don't know.
3) Some are fixed term accounts which don't allow withdrawals, but it's usually obviously.
4) Only if you can tie it up for a certain period of time.

Chadiii

Thanks Lokolo.

Tax is deducted directly from my wages. How would I pay tax on my savings if I don't need to complete a tax return?

Sparky47

Chadiii wrote: »

Thanks Lokolo.

Tax is deducted directly from my wages. How would I pay tax on my savings if I don't need to complete a tax return?

Unless you register as a non taxpayer, then tax will automatically be deducted by the bank/building society your savings account is with.
If it is a cash ISA then you will not pay tax although the maximum you can pay in is limited to £5340 each tax year.

Chadiii

Ahhh... that would explain it. Thanks!

But what rate tax would I pay on, say, £15k?

t0rt0ise

The interest on 15K is not going to be so great so you will just pay basic rate income tax on it... 20%..

See some rules.. http://www.hmrc.gov.uk/rates/it.htm

dtsazza

There's an even better page on HMRC explaining how you pay tax on savings interest.

Chadiii wrote: »

I have a regular job and have never filed a personal tax return. According to what I have read on the HM Inland Revenue website I don't need to file a tax return as I won't earn over £10k income from savings. Is this true? If so, I don't understand the point of an ISA.

I think you might be getting confused with Capital Gains Tax, and/or a stocks & shares ISA.

If you buy a thing, it goes up in value, and you sell it, you're liable for tax on the money you've made from the value change - this is Capital Gains Tax. Everyone has a CGT allowance of ~£10k each year, so if you make less than that in capital gains then you won't need to pay CGT on it. Shares fall exactly into this definition of "a thing", and a S&S ISA means that you avoid CGT if you make (and realise) over £10k in a year.

But - cash ISAs are just cash savings accounts. Interest on cash savings is treated as income*, so it's taxed just as the pay from a job would be.

Your personal allowance counts for both, so someone who doesn't earn anything from a job could get £7,475 in interest before they started paying tax. Someone who earned £7,200 could get £275 of interest tax free. But most people are "taxpayers", and so every bit of interest they earn is taxed at their marginal rate (20% basic rate, or 40% for higher rate taxpayers, or 50% for additional rate taxpayers).

Interest from cash ISAs are immune to these taxes - so it's worth using a cash ISA if you earn more than ~£7.5k a year.

*Technically not true but to all intents and purposes you can treat it as if it is