Deciding how to manage my ISA tax-free allowance

davidbrown91

Hi all,

I read the Starting Savings guide and it says "All taxpayers should pour money into a cash ISA first. These are just like a normal savings account, but tax-free."

Does pour mean to feed a monthly drip of savings into the ISA or deposit one big chunk and fulfil that tax-free allowance in one go?

Basically what I am trying to ask is, surely a better tactic is to save all your money in monthly interest paying savings accounts, and then when the gross interest deadline approaches for your ISA, transfer your tax-free allowance across in order to benefit from the interest. Having your savings sit in an ISA for a year waiting for this interest paying date surely means you are losing out on interest you could be earning from a savings account?


I am sure there are a number of restrictions placed by the banks to prevent this though.

Any advice and enlightenment here would be greatly welcomed.


Regards


David.

Biggles

I'm not completely sure exactly what you are asking but:-

Interest earned in a 'normal' savings account is subject to tax, on a daily basis no matter when it is actually credited to the account.

Interest earned in an ISA is calculated gross of tax, on a daily basis no matter when it is actually credited to the account.

Hooloovoo

davidbrown91 wrote: »

Basically what I am trying to ask is, surely a better tactic is to save all your money in monthly interest paying savings accounts, and then when the gross interest deadline approaches for your ISA, transfer your tax-free allowance across in order to benefit from the interest.

Interest is calculated daily, regardless of whether it is paid monthly or annually.

For example, you can't pay money into your ISA the day before your "gross interest deadline" and expect to get a whole years worth of interest!

As to whether it is better to save in a taxed account before transferring into an ISA - that depends on the interest rates. If the after-tax interest rate of the monthly saver is greater than the zero-tax interest paid by the ISA, then yes it is better to pay into the regular saver first.

droopsnoot

I think you're reading in too much to the use of the word "pour". My impression is that it's intended to mean that savers should make as much use of these tax-free savings and/or investments as they can, not the talk about how or when you get it there. In fact, the approach may vary between cash and SS ISAs.

innovate

The savings guide is also very badly out of date - pouring money into a cash ISA is by no means the smartest thing to do first these days.

I am all for maximising the use of annual allowances, but nowadays it makes a lot more sense to save up in an interest bearing current account and/or in regular savers. Then just before the tax year ends, or once your regular saver matures, put the money into a cash ISA.

Having said this, if you are planning on spending the money within a couple of years, you might as well forget about the ISA altogether because it will, on current interest rates, never pay you as well as one of the good current accounts or regular savers.

planteria

agreed.

i think the real benefit of ISAs is to use them for long-term S&S Investment.

Cash ISAs paying lower rates than current accounts or regular savers are often not a great deal.

jimjames

planteria wrote: »

agreed.

i think the real benefit of ISAs is to use them for long-term S&S Investment.

Cash ISAs paying lower rates than current accounts or regular savers are often not a great deal.

Very true. I've not used a cash ISA for more than 10 years, all my ISA allowance is used for S&S ISAs instead

Yorkie1

planteria wrote: »

agreed.

i think the real benefit of ISAs is to use them for long-term S&S Investment.

Cash ISAs paying lower rates than current accounts or regular savers are often not a great deal.

To clarify, I think you mean that Cash ISAs are not often a great deal if they pay lower rates than current accounts or regular savers do after deduction of the saver's applicable rate of income tax.

And then that is a generalisation as someone might be liable to higher rate tax shortly and would benefit significantly more from the tax free shelter.

I put my money into the FD 6% monthly regular saver and will put it into my ISA at 3% at the end.

The ISA apparently matches my Lloyds Vantage account but as the latter then has tax deducted, it is a better deal than the Lloyds.

Everyone is advised to keep some money in a rainy day fund and therefore it is, as someone summarised in a previous post, all about being clever about the interest rates and your particular rate of income tax.

Archi_Bald

Yorkie1 wrote: »

I put my money into the FD 6% monthly regular saver and will put it into my ISA at 3% at the end.

Are you sure? Which ISA pays 3%, and allows new contributions?