Santander 123 interest help

HAwan

I'm only just learning about bank accounts, mortgages, investing and savings. And I'm new to the forums, please be patient with me.

I have just over £10,000 saved in my account. My understanding from reading the website so far it that I should move to a Santander 123 current account now (from my current TSB Graduate account), and then open a NISA at the end of March 2015. That way, I would get interest on my current account and when I put the money into a NISA I won't pay tax on the £15,000.

The Santander 123 benefits would only apply as long I continue to pay in £500/month and have at least two direct debits going out of the account.

The basic interests are:
3% AER interest or 2.4% after basic tax on £3,000-£20,000 savings
1% cashback on water and council tax or 0.8% after basic tax
2% cashback on gas & elec or 1.6% after basic tax
3% cashback on phone, internet & TV or 2.4% after basic tax

So based on my current savings, I'd get:
£20 interest per month (£10,000 savings * 2.4% interest / 12 months)
47p on water (£700 annual water bill * 0.8% cashback / 12 months
76p on council tax (£1141.71 council tax * 0.8% cashback / 12 months)
£2.40 on gas and electricity (£1800 annual bills * 1.6% cashback / 12 months)
96p on broadband (£480 annual bills * 2.4 cashback / 12 months)

20+.47+.76+2.4+.96=24.59

So I'd get roughly £25 each month from having a Santander 123 current account?

ffacoffipawb

HAwan wrote: »

I'm only just learning about bank accounts, mortgages, investing and savings. And I'm new to the forums, please be patient with me.

I have just over £10,000 saved in my account. My understanding from reading the website so far it that I should move to a Santander 123 current account now (from my current TSB Graduate account), and then open a NISA at the end of March 2015. That way, I would get interest on my current account and when I put the money into a NISA I won't pay tax on the £15,000.

The Santander 123 benefits would only apply as long I continue to pay in £500/month and have at least two direct debits going out of the account.

The basic interests are:
3% AER interest or 2.4% after basic tax on £3,000-£20,000 savings
1% cashback on water and council tax or 0.8% after basic tax
2% cashback on gas & elec or 1.6% after basic tax
3% cashback on phone, internet & TV or 2.4% after basic tax

So based on my current savings, I'd get:
£20 interest per month (£10,000 savings * 2.4% interest / 12 months)
47p on water (£700 annual water bill * 0.8% cashback / 12 months
76p on council tax (£1141.71 council tax * 0.8% cashback / 12 months)
£2.40 on gas and electricity (£1800 annual bills * 1.6% cashback / 12 months)
96p on broadband (£480 annual bills * 2.4 cashback / 12 months)

20+.47+.76+2.4+.96=24.59

So I'd get roughly £25 each month from having a Santander 123 current account?

The cashback isn't taxable, otherwise figures look OK.

YorkshireBoy

The DDs don't need to pay out every month (but watch out for them lapsing under the dormancy rules after 13 months of non-use).

Your interest calculations are slightly out. For accuracy, monthly interest for a £10K static balance is calculated as:

£10,000 x 2.96% / 365 x n x 0.8

where n = number of days in the statement/billing period (28/29/30/31 depending on month and leap year or not).

So I'd get roughly £25 each month from having a Santander 123 current account?

Less the £2 fee of course.

colsten

HAwan wrote: »

and then open a NISA at the end of March 2015. That way, I would get interest on my current account and when I put the money into a NISA I won't pay tax on the £15,000.

In addition to the replies already posted: don't think there is any magic in ISAs (or NISAs, as some people prefer to call them, but they are just ISAs). Ignore the mantra that cash (N)ISAs are a 'must' - do your numbers and then decide what is best for you.

You do not pay tax on your balance, you just pay tax on your interest (outside cash ISAs)

E.g. if you have £15,000 all year long in an account that pays 3% AER, your taxable income is 3% of £15,000 = £450. If your account is a cash ISA, you can keep the £450. If your account isn't a cash ISA, the £450 is taxable at your tax rate. For most people, that's basic rate @ 20%, so you would need to pay 20% tax on £450, i.e. £90, and you'd be left with £360 instead of £450.

However.......there is currently no cash ISA that pays you 3% interest. In all likelihood, there won't be an ISA in the next 18-24 months, and may be not for a lot longer, either, that pays you anything near 3% interest. So putting money into a cash ISA whilst you can get a lot more after-tax interest in a current account just makes little sense for most people.

If you are putting money away for the long term (5-7 years plus), an ISA does make sense. However, that would be an investment ISA, not a cash ISA. If you are 'just' saving up for the next 5 or so years, it probably makes little sense to put any of your money into a cash ISA.

What is your tax rate? Basic? Higher? Additional?

Eco_Miser

You have a TSB account. Convert it to a Classic Plus and earn 5% on £2000. Open another for a further £2000 (or just open two). Open a Lloyds Club for 4% on £5000. You could open the Santander for the cashback, and just earn 1% on the remaining £1000+, or open a Nationwide Flexdirect for 5% for one year (in which case only put £4000 in Lloyds). All rates are AER, which you don't achieve with a maxed-out account, and you need to deduct tax at your marginal rate.

HAwan

Thanks for the replies:

1) ffacoffipawb: So I re-did the math and if the cashback isn't taxable then instead of making £24.59/month, I'd make £25.73/month (before monthly fee). Crazy how small it actually is!

2) YorkshireBoy: That calculation is really confusing. I'm not the best at math...? Also my £10,000 won't stay static as I plan on transferring my monthly salary into that account until I get to just under £20,000 and watch it each month so I don't lose the 2.4% interest after basic tax on £3,000-£20,000 savings. Does that make sense?

I forgot the monthly fee! 25.73-2= £23.73 on a static £10,000 savings.

3) colsten: I only pay tax on the interest? Okay, I missed that part. (I should have figured that because I can assume ISA stands for Interest Savings Account). I pay basic tax.

Let's say I have a single Santander 123 account with £19,500 and at the end of March 2015 I move £15,000 into an ISA. I'll save £90 as you say in the ISA. The interest I'd get per month from having around £19,500 in a Santander 123 account would be (19500*0.024)/12= £39 for March. But because I'd move £15,000 out, the interest I'd be left with £4,500 saving would be (4500*0.024)/12= £9 for March. So,

Only have Santander 123 = £39 interest - £90 tax - £2 account fee = £53 loss
Open an easy-access cash ISA = £90 tax saving + £9 interest - £39 original interest - £2 fee = £58 gain

Then transfer the £15,000 back into the Santander 123 account and keep it below £20,000 to continue getting 2.4% after basic tax interest.

That's a difference on £111. Assuming I haven't made any more mistakes, I think that's well worth doing.

Now I just have to red about investment ISAs *sigh*. Very interesting post, thank you.

Eco Miser: That still doesn't compare to Santander's 123 account benefit. Plus, it means having one account rather than 3+. I'll have a Santander 123 account, then when I reach £20,000 I'll open another one.

Jogle

HAwan wrote: »

Let's say I have a single Santander 123 account with £19,500 and at the end of March 2015 I move £15,000 into an ISA. I'll save £90 as you say in the ISA. The interest I'd get per month from having around £19,500 in a Santander 123 account would be (19500*0.024)/12= £39 for March. But because I'd move £15,000 out, the interest I'd be left with £4,500 saving would be (4500*0.024)/12= £9 for March. So,

Only have Santander 123 = £39 interest - £90 tax - £2 account fee = £53 loss
Open an easy-access cash ISA = £90 tax saving + £9 interest - £39 original interest - £2 fee = £58 gain

Then transfer the £15,000 back into the Santander 123 account and keep it below £20,000 to continue getting 2.4% after basic tax interest.

That's a difference on £111. Assuming I haven't made any more mistakes, I think that's well worth doing.

I might have misunderstood you but it's now the second time that I have misunderstood you if so....

An ISA only provides for no tax to be paid on the interest while the money is within the ISA. By moving the money from the 123 to an ISA, you won't regain the tax paid on the interest received in the 123 account. Or have I misunderstood you?

Archi_Bald

HAwan wrote: »

3) colsten: I only pay tax on the interest? Okay, I missed that part. (I should have figured that because I can assume ISA stands for Interest Savings Account). I pay basic tax.

ISA stands for Individual Savings Account. Cash ISAs are just savings account with special rules, one of them being you do not pay tax on the interest you earn (and obviously also not on your balance).
In non-ISA savings accounts, you only ever pay tax on interest you earn, not on your balance.

HAwan wrote: »

Let's say I have a single Santander 123 account with £19,500 and at the end of March 2015 I move £15,000 into an ISA. I'll save £90 as you say in the ISA. The interest I'd get per month from having around £19,500 in a Santander 123 account would be (19500*0.024)/12= £39 for March. But because I'd move £15,000 out, the interest I'd be left with £4,500 saving would be (4500*0.024)/12= £9 for March. So,

Only have Santander 123 = £39 interest - £90 tax - £2 account fee = £53 loss
Open an easy-access cash ISA = £90 tax saving + £9 interest - £39 original interest - £2 fee = £58 gain

you are massively overcomplicating things and your calculations are wrong. You are not making any loss in a 123 if, in any one month, you earn more than £2 interest after tax, or make more than £2 cashback. The £90 tax is for an entire year, not for one month. In addition, you don't save the tax due on the 123 between now and when you put your money into a cash ISA.

Your calculations are further wrong in that you seem to be assuming you get 3% AER in a cash ISA. This is impossible now, and most likely also impossible next March.

HAwan wrote: »

Then transfer the £15,000 back into the Santander 123 account and keep it below £20,000 to continue getting 2.4% after basic tax interest.

I am not with you. Why would you move the money into a cash ISA and then back into the 123? If you want it in the 123, you might as well keep it there in the first instance.

HAwan wrote: »

I'll have a Santander 123 account, then when I reach £20,000 I'll open another one.

you can only open another 123 if it is a joint account with someone else.

YorkshireBoy

HAwan wrote: »

2) YorkshireBoy: That calculation is really confusing. I'm not the best at math...? Also my £10,000 won't stay static as I plan on transferring my monthly salary into that account until I get to just under £20,000 and watch it each month so I don't lose the 2.4% interest after basic tax on £3,000-£20,000 savings. Does that make sense?

For a fluctuating balance, you calculate individual days' interest as follows:

Closing balance x 2.96% / 365

At the end of the statement/billing period you add up all these days and then multiply by 0.8 for tax deducted (if applicable).

Not sure I understand what you mean by "watch it each month". You seem to be thinking you'll lose interest on the entire balance if you exceed £20K? If so, worry not...you simply won't earn interest on the element over. You'll still get 2.96% gross on the first £20K of your balance.

HAwan

Okay, okay. I think I'm starting to get it. My posts above were based on complete misunderstandings. As I said, I’m still new to actually looking at the amount of tax I pay (I’m 22 by the way). Normally when I get my payslips I just put them it into a drawer and that’s that.

Because of Martin Lewis’ blog/article on the best ISAs I thought it I have to a) pay tax each month on the interest AND b) pay tax at the end of the tax year on 5 April – but by putting £15,000 into a cash ISA, I could avoid paying the b) tax at the end of the year. That’s why I thought I’d lose money by not transferring it into the cash ISA, and then transfer it back into the 123 account to continue getting interest.

Also, yes YorkshireBoy, I did think I would stop getting interest if I exceeded £20,000. Also, quick question if I may, why it is 2.96% rather than 3%? – is it because of the difference in the number of day per month or just some technical rule?

One more thing about the ISA. When I exceed the limit, I’d only start paying tax on anything over £15,000 or does it just stop completely at £15,000?

Thank you everyone. I hope I don’t sound like an absolute walnut.

anoncol

Think of the tax like an income tax. The money in your account is already yours, so its not new income, but the interest in new income so you pay tax.