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1.5% (or 1.65%) ISA versus 4% interest on current account

Hello everyone
This is my first time posting so I'm hoping I'll get a reply from some kind soul.

I've found this site recently and heard Martin talking on TV in the past about how important it is to put your money into ISAs first as the money kept there is tax-free, so I understand the "concept". However I'm unsure of how to compare the very low interest rates currently offered to those opening ISAs with the taxable but higher interest rates offered on current accounts at the moment. I have tried to figure out where the best place to put my money would be but fall down with my (very) basic maths skills unfortunately.

I have approximately £7,500 to invest in the 2014/15 tax year and which I am happy to invest a a fixed rate for one year. My current savings are held in a Lloyds TSB instant access ISA which is paying 1.5%. However Lloyds have just offered me an upgrade on my current account to "Club Lloyds" which pays 4% on balances between £4,000 and £5,000.

Is it better to keep £4,000 - £5,000 in the current account and pay interest on it in order to get the 4% interest or to put what I can into an ISA paying 1.65%? Does anyone have the maths skills and knowledge to help me with this?

I'm a basic rate taxpayer - I work two jobs and basically get slaughtered by the taxman on my second job as it is so I'm trying to maximise whatever savings I can.

Help? Please?

Many thanks in advance.
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Comments

  • freddysmith
    freddysmith Posts: 2,002 Forumite
    Part of the Furniture 1,000 Posts Combo Breaker
    Have a look on the Budgeting & Bank Accounts forum at the TSB Classic Plus 5% account thread, that may also be of some interest to you.
  • CLAPTON
    CLAPTON Posts: 41,865 Forumite
    10,000 Posts Combo Breaker
    Hello everyone
    This is my first time posting so I'm hoping I'll get a reply from some kind soul.

    I've found this site recently and heard Martin talking on TV in the past about how important it is to put your money into ISAs first as the money kept there is tax-free, so I understand the "concept". However I'm unsure of how to compare the very low interest rates currently offered to those opening ISAs with the taxable but higher interest rates offered on current accounts at the moment. I have tried to figure out where the best place to put my money would be but fall down with my (very) basic maths skills unfortunately.

    I have approximately £7,500 to invest in the 2014/15 tax year and which I am happy to invest a a fixed rate for one year. My current savings are held in a Lloyds TSB instant access ISA which is paying 1.5%. However Lloyds have just offered me an upgrade on my current account to "Club Lloyds" which pays 4% on balances between £4,000 and £5,000.

    Is it better to keep £4,000 - £5,000 in the current account and pay interest on it in order to get the 4% interest or to put what I can into an ISA paying 1.65%? Does anyone have the maths skills and knowledge to help me with this?

    I'm a basic rate taxpayer - I work two jobs and basically get slaughtered by the taxman on my second job as it is so I'm trying to maximise whatever savings I can.

    Help? Please?

    Many thanks in advance.

    well, the maths is basically as follows

    a interest of 4% AER that is taxed works out at 4% x 80% i.e. 3.2%

    so for an ISA to be equivalent it needs to pay at least 3.2%


    so for 5000 held for a year at 4% subject to tax would yield
    5000 x 4% x 80% = £160 after tax deducted

    whilst you ISA at 1.5% would yield 5000 x 1.5% = £75
  • Mee
    Mee Posts: 1,514 Forumite
    Part of the Furniture 1,000 Posts Name Dropper Photogenic
    It's a tricky one as we not comparing like with like. The plus of ISA/NISA for me is that all future gains will be sheltered from the taxman under current tax legislation.
    Free thinker.:cool:
  • Thanks all.
    From what I'm reading I think I might be best opening up an ISA but keeping the majority of the money in a current account until the end of the year ... I think ... decisions, decisions :)
  • moneyfoolish
    moneyfoolish Posts: 681 Forumite
    Part of the Furniture 500 Posts Name Dropper
    If it were we, I would keep it all in high interest current accounts until ISA rates improve. You can then stick £15,000 into a new ISA each year which if you're starting with £7,500 probably means you will be able to move it all into an ISA in one go when rates are better.
  • Thankyou - that's food for thought as I hadn't considered that option.
  • adindas
    adindas Posts: 6,856 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    edited 3 April 2014 at 1:49PM
    Mee wrote: »
    It's a tricky one as we not comparing like with like. The plus of ISA/NISA for me is that all future gains will be sheltered from the taxman under current tax legislation.

    What you are saying is true.
    But reality is, you could always find a current account and/or instant saving account which pay a better net interest rate than ISA at the same tax year for basic rate tax payers. This is at least true since the past few years.

    So if you keep your eye on and keep moving your money you might still end up with a better return with current account and/or saving account. You will even get a better return with drip feeding to a higher interest regular saver.

    But certainly better to have both (e.g. more container) to spread the risk, especially if you have a lot of saving ...
  • jimjames
    jimjames Posts: 18,875 Forumite
    Part of the Furniture 10,000 Posts Photogenic Name Dropper
    edited 3 April 2014 at 7:50PM
    Mee wrote: »
    It's a tricky one as we not comparing like with like. The plus of ISA/NISA for me is that all future gains will be sheltered from the taxman under current tax legislation.

    It is comparing like with like. If you have under £15k to save in the next 12 months and under £45k to save in the next 3 years why would you even consider an ISA now when you can get far more outside.

    If ISA rates increase you still have £45k limit to put cash in which is more than enough for the average person who has under £2000 savings.

    Future gains are only really an issue for S&S ISAs as you don't get any capital gains inside a cash ISA only income. In the current situation S&S ISAs are still worth doing for that reason.
    Remember the saying: if it looks too good to be true it almost certainly is.
  • DiamondLil
    DiamondLil Posts: 749 Forumite
    Part of the Furniture 500 Posts Photogenic Name Dropper
    Mee wrote: »
    It's a tricky one as we not comparing like with like. The plus of ISA/NISA for me is that all future gains will be sheltered from the taxman under current tax legislation.

    Although I wouldn't disagree with others (the figures are hard to ignore), as someone who has reached that point in time where "future gains" are now become present capital and income, I have to stress the importance of Mee's statement.
  • innovate
    innovate Posts: 16,217 Forumite
    10,000 Posts Combo Breaker
    DiamondLil wrote: »
    Although I wouldn't disagree with others (the figures are hard to ignore), as someone who has reached that point in time where "future gains" are now become present capital and income, I have to stress the importance of Mee's statement.
    It depends a great deal on the how much you would like to shelter, and in what timescale. For a huge number of people, Cash ISAs should be totally irrelevant as long as some current accounts pay vastly more than cash ISAs, and the ISA limit is £15K. Very few people will be able to afford £15K a year into a savings account. Very few people have existing ISAs with more than £15K in them. Anybody planning on spending their cash in the next 2-3 years is more than likely to get no benefit at all from cash ISA - quite the contrary, they would lose out compared with the best rates in the market.
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