Are ISAs still worthwhile for non taxpayers?

DemiDee

I've never been great with figures and maths, and so excuse my ignorance here, but I'm finding it difficult to deliberate whether ISAs are worthwhile for those currently on a low income and thus not earning enough to pay tax? Is the wisdom of having an ISA based on amount in a savings account, or the amount one is earning? I had assumed that, if one has savings, they are naturally better in an ISA, because you receive more interest, but I was told by my bank this week that if a non taxpayer, I'd probably be better off putting my savings into a savings account rather than an ISA. I'd appreciate any advice on this (possibly very simple) question.

chipp

There are laws governing who's able to give financial advice, and I'm not qualified, but if you're a non-taxpayer then you can get your interest from virtually any UK savings account paid gross (ie without deduction of income tax) just by filling in a form (I think it's an R85, your bank will have them). ISAs don't necessarily pay the best rates but do pay their interest gross without you having to fill in an R85, although I'm not sure whether they are totally exempt from tax or whether they are only exempt at basic rate (not being a higher rate taxpayer this doesn't concern me!). If you are comparing rates, it's the gross rates you should be comparing.

If in the future you become a taxpayer then you will have to pay tax on interest received from any savings accounts that aren't ISAs for the tax years in which you are liable for tax, but not on interest received from those same accounts during years when you haven't been due to pay income tax.

If you might need to dip into your savings then if they're in an ISA you may not be able to top the account back up as there's a limit on how much you can pay in each year.

psychic_teabag

An ISA is useful if you pay any income tax, on either earnings or savings interest. Tax is based on combined earnings and interest.

Even if you don't pay tax now, if you might ever be a taxpayer in the future, there's a case for building up a pot of ISA money since it will always be tax-free.

March/April are "ISA season" : banks are offering high rates on ISAs at the moment to try to attract last-minute and early-bird money. You can currently get an ISA paying more than a non-ISA. So while a non-taxpayer doesn't benefit from the tax status of an ISA, they can take still take advantage of the goldrush. At other times of the year, non-ISA accounts may offer more than ISA acounts.

The other thing you might consider is a regular savings account. These offer higher interest rates, but limit how much you can put in. Monmouthshire BS currently have one offering 4% which seems to have fewer restrictions than most regular savers. You don't have to pay in every month, etc. There are others offering 5%, 6% or even 8% but they are much more restrictive.

If you don't use an ISA, there's a form you can fill in to get the interest paid without tax deducted.

badger09

DemiDee wrote: »

I've never been great with figures and maths, and so excuse my ignorance here, but I'm finding it difficult to deliberate whether ISAs are worthwhile for those currently on a low income and thus not earning enough to pay tax? Is the wisdom of having an ISA based on amount in a savings account, or the amount one is earning? I had assumed that, if one has savings, they are naturally better in an ISA, because you receive more interest, but I was told by my bank this week that if a non taxpayer, I'd probably be better off putting my savings into a savings account rather than an ISA. I'd appreciate any advice on this (possibly very simple) question.

Its not based on the amount held in a savings account, or directly on the level of your earnings. It depends whether you are ever likely to become a taxpayer in the future.

If you are a taxpayer, you are usually better saving in an ISA because the interest is tax free - for life (or until the Government changes the rules :eek:) If you are not a taxpayer, and unlikely to become one, then you are better saving in the highest rate account you can find, which suits your needs.

The highest interest rates are usually found on longer term fixed rate (over 2 years?) accounts or regular savers. Regular savers are great if you don't have a lump sum but can afford to save something each month.