Best savings product for students with no taxable income.

sjmon

Here are some thoughts for anybody about to become a student and already has savings. I thought I would post this here first before one of the savings threads.

Between 5 April and 5 September it seems unlikely that I am going to earn enough to qualify for tax (£9,440) and then I will become a student with loans/grants/bursaries (non-taxable).

Best instant access ISA rates are 2.5% for me this year which makes higher rate savings accounts more appealing as I can't be taxed on them. Have I worked that out correctly?

If that is correct, I think it would make sense to get a Santander 123 CA as the interest I would earn would be greater at 3% - £24 fee than I could get in a 2.5% ISA. Plus, all that cash back.

phona

The main point your raise is a good one: for non-taxpayers the rate on a standard savings account only has to be as good as an ISA. This is because you will not pay tax on any interest from any source. However, remember that subscriptions to an ISA remain tax-free for as long as they stay in the ISA so if you'll be a taxpayer in the future (I assume you'll look for a graduate job!) then it may be worth considering an ISA anyway.

Considering the Santander 123 current account specifically, you need to make sure you completely understand all the terms of the account. Are you aware that the 3% rate only applies to balances over £3000? I don't know how much you have saved at the moment, but even above this your time as a student is likely to be expensive - will you always have more than this? Below £3000, the interest rate offered by the 123 CA is beaten by the 2.5% ISA rate.
The cashback offered with the account is on Santander mortgages, council tax, utilities and communications. How much will you actually pay for these? The average student does not have a mortgage and no full-time student pays council tax. As for utilities, you may not pay these either if you are living in halls of residence.

To decide if the 123 CA is right for you, you will require a lot of detail about what you will be spending as a student - which is very difficult to predict now. Try to crunch the numbers to work out if it's a viable option. I would recommend you look into student current accounts, offered by most banks, coupled with an ISA or standard savings account.

agrinnall

Phona is right to point out the potential benefits of using an ISA now, even though you are not currently a taxpayer. Being able to carry tax free savings forward from year to year can greatly enhance the amount of interest you can make. I have just gone through my own contributions to cash ISAs (and to a TESSA, their predecessor): I have put in £48,780, and the current value is £60,586, with around £1900 more interest to be added in the next few weeks, all without paying a penny in tax.

Masomnia

As the other guys have said, if you're planning on keeping the money long term I'd go for the ISA too, as you only get one chance to use this year's allowance. The difference is pretty negligible now, but if you're a tax payer in future (and especially a higher rate tax payer) it'll add up!

fishforsale

Masomnia wrote: »

As the other guys have said, if you're planning on keeping the money long term I'd go for the ISA too, as you only get one chance to use this year's allowance. The difference is pretty negligible now, but if you're a tax payer in future (and especially a higher rate tax payer) it'll add up!

most ISA are a bad choice, they barely protect you from inflation

only for the lazy

i would suggest you use the halifax 5% account or if you dont need the money look to fund on zopa(tax free 6%)

Masomnia

If you can get 5% then fair enough, but I still think long term the ISA is a better choice, although you don't know how things will pan out. At the end of the day you have to work out what's best in terms of your own plans.

Zopa isn't tax free afaik, but although you can beat savings accounts you have to factor in other risks.

agrinnall

fishforsale wrote: »

most ISA are a bad choice, they barely protect you from inflation

only for the lazy

i would suggest you use the halifax 5% account or if you dont need the money look to fund on zopa(tax free 6%)

Actually, it's doubtful whether most ISAs even pay above inflation at the moment, but if you pick carefully they are still better than most other options if you don't want to put your money into the stock market. I'm not sure what Halifx 5% account you are referring to, the only 5% account listed on MSE is the Nationwide one, and the only Halifax account is the £5 per month one.

StacFace

I know ISAs are really good for those who do pay tax but I think people can be a bit too keen to recommend them to everyone when they're not always best. The OP has said they won't be earning enough to pay tax and are only just starting their degree this September. Therefore right now they're not the best option if non-ISA accounts are offering better gross rates and it'll be at least 3 years before they'll be getting net rates instead. Yes it could be beneficial in the future for them but the OP hasn't said what their level of savings is or if they'll need any of this to support themselves if their loan and grant won't be enough.

Therefore I think it's important to either ask for this info or point out they should consider an ISA if their savings are high enough to fill an ISA each year (or at least high enough to fill it all but one year where there is still money left to put in that year) without withdrawing from the previous years'. It could be that their savings add up to less than the yearly limit and their loan and grant adds up to what they spend each year, in which case it would be best to ignore net rates for now and then consider moving it to an ISA just before the tax year ends in their final year.