Better than a Savings Account?

aidso

I have been trying to get my head around the difference between a Savings Account and an ISA. I know that you don't get taxed on an ISA. You do get taxed on a Savings account, but you get taxed on the interest accrued, yes? So if I leave money sitting then they don't take a tax "for the sake of"? So consider the following:

Saver A: 5%
ISA A: 3%
Amount £100

On calculating interest on the ISA I will have:
100x0.03 = £103.00 (No Tax)

On calculating interest on the Savings Account I will have:
(100x0.05) = £5 - (£5x20%) = £4 = £104.00

Therefore by taking out a Savings Account which allows me a minimum deposit, multiple withdrawals and multiple means of accessing it, I am gaining an extra £1/£100?

Have I done this correctly? So while interest rates stay the same for Savings and ISAs, then it is better to go for an ISA. But if you can find a higher rate, then a Savings Account is better?

Thanks

psychic_teabag

That's correct in the short term. But need to consider the long-term implications. Once money is in an ISA, it's tax-free forever (or until the rules change).

eg not so long ago, could get 4% (taxable) on £7k from Lloyds current account. Even after basic-rate tax, this beat the ISAs available at the time. So short term it made sense to go for that rather than ISA. But now that this interest rate has been withdrawn, anyone who had chosen that over ISA has lost out long-term.

Accounts offering higher rates tend to limit the amount that can be deposited (eg Lloyds account limited to £7k ; regular savers tend to limit monthly deposit).

So tactically it makes sense to go for best rate (after any tax) you can. Esp. if you'll be spending the money in a year or two anyway..

Strategically, it makes sense long-term to fill ISA allowance each year - possibly waiting until the last minute if there are better tactical options.

A good tactic might be to build up savings in a regular saver account over the year, and put it into an ISA as it matures.

aidso

OK, Thanks Psycic Teabag.
I am currently reviewing ISAs for myself and my mother and was just thinking maybe a Savings Account was better, but your explanation makes sense.

Thanks for your help.
A.

thenudeone

An ISA IS a savings account, just one where the interest doesn't get taxed, that's all.

It's still a savings account in every respect of the description.

opinions4u

So where are you getting this 5% savings account from?

aidso

opinions4u wrote: »

So where are you getting this 5% savings account from?

I was speaking hypothetically, pointing out that it is misleading to tell people that an ISA is better, when you could be better off with a Savings Account instead.

In the current climate of rates being the same, the ISA is always going to be the best option.

bubbles0169

can someone help me please?
i need to move money from my isa to my current account to pay a bill, will i get taxed on it after it goes into the current account?

psychic_teabag

Tax is on interest earned outside an ISA. Taking money out of an ISA does not spontaneously incur any tax, it merely reduces the amount of money you have inside the ISA earning tax-free interest in the future.

bubbles0169

i understand the isa is tax free, does that mean if i put money into current account i will be taxed?
sorry if i seem thick, i need things explaining a few times to grasp it!

fiesta04

No you wont be taxed.
EXAMPLE: You take £1000 from ISA and put it all in current account.
All the £1000 has done is stopped earning any interest.
That is all there is to it, so please don't worry.

F4

bubbles0169

ah thanks! i just got the interest paid on the isa then thought id lose it all paying it out to the tax man any way!