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Are ISA's ALWAYS the best option?
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ItchyFeet
Posts: 276 Forumite
Hi,
I have no savings at present and am only now in the position to start accumulating some.
I was of the opinion that i should save in an ISA before any other account (i won't be able to fill my whole allowance), but is this ALWAYS the case? Are there any circumstances when picking a higher interest rate savings account over an ISA would be better?
Thanks.
I have no savings at present and am only now in the position to start accumulating some.
I was of the opinion that i should save in an ISA before any other account (i won't be able to fill my whole allowance), but is this ALWAYS the case? Are there any circumstances when picking a higher interest rate savings account over an ISA would be better?
Thanks.
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Comments
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Only if the after tax return is better on the savings product.0
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Thrugelmir wrote: »Only if the after tax return is better on the savings product.
Thanks. How do i work that out?0 -
If you are normal rate income tax I think it is 20 % tax you pay on your savings so it needs to be at leased 20% better rate than the Isa0
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If you are a basic rate tax payer, then an ordinary account will need to earn 1.25 times the amount of an ISA to make it worthwhile.
A quick look at the best buy tables shows that you could get a 3 year fixed rate ISA at around 4%, so this is the equivalent of a taxable account earning 5%. Currently I can't find a 3 year account which matches this criterion."The trouble with quotations on the Internet is that you never know whether they are genuine" - Charles Dickens0 -
If you are normal rate income tax I think it is 20 % tax you pay on your savings so it needs to be at leased 20% better rate than the Isa"The trouble with quotations on the Internet is that you never know whether they are genuine" - Charles Dickens0
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Are there any circumstances when picking a higher interest rate savings account over an ISA would be better?
Yes.
The ISA interest rate is tax free. So let's call it 3% net. So if you found an account paying 3.75% or more (that's 3% net after tax) then that's better provided you are only saving in it for a year. Or you are saving only small amounts.
The point is, many of us have money in our cash ISA's put there 15 years ago! So it has rolled up for 15 years tax free. Had we found a better account 15 years ago, it would have provided a 'year of pleasure' but followed by a 'lifetime of pain' since our ISA allowance was lost for that year.
General experience tells us that currently, there are not many 'non ISA' accounts that pay enough extra to negate the tax free status. The only possible main exception is NS&I index linked bonds, but even then, it will ultimately depend upon what inflation does in the future, by comparison with savings rates.0 -
How about for stocks and shares ISA's? Are dividends income tax free if held in an ISA? More specifically, and slightly peripheral to the OP's question, if I invest in an index tracker fund or ETF where dividends are reinvested (ie accumulation units or similar) is there normally income tax to pay on the dividends received by the fund and if so, can this be avoided by holding the investment in an ISA? (I am thinking about the parallel situation where shares are held directly and dividends automatically reinvested in more shares - income tax is payable on the dividends even though the cash is being reinvested. I just wanted to check whether this also applies to accumulation units). Any help on this would be much appreciated.0
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There is no further tax to be paid by higher-rate taxpayers on dividends from shares in an S&S ISA. For basic rate and non-taxpayers it makes no difference (but one question might be 'will I move into a higher tax band in the future?').
Accumulation units still have a 'dividend', but this is held within the fund and the unit price of the funs does not fall as that for an income unit would. You will still get a tax credit for accumulation units, and higher-rate taxpayers will have to pay additional taxLiving for tomorrow might mean that you survive the day after.
It is always different this time. The only thing that is the same is the outcome.
Portfolios are like personalities - one that is balanced is usually preferable.
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Thanks for the quick reply. PLease let me check I understand. Income tax is payable on the dividends received by 'accumulation' funds even though they are reinvested in the fund. If the fund is held outside an ISA, the tax is payable at the investors marginal rate. If held inside an ISA, the tax is limited to basic rate even for higher rate taxpayers. Is this correct? Supplementary question - does the tax treatment differ if the fund invests in fixed income bonds/ gilts?0
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Ark_Welder wrote: »There is no further tax to be paid by higher-rate taxpayers on dividends from shares in an S&S ISA. For basic rate and non-taxpayers it makes no difference (but one question might be 'will I move into a higher tax band in the future?').
If close to retirement ISA interest does not count towards the income limit for age related allowances.'Just think for a moment what a prospect that is. A single market without barriers visible or invisible giving you direct and unhindered access to the purchasing power of over 300 million of the worlds wealthiest and most prosperous people' Margaret Thatcher0
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