ISA or just pay the tax?

rebecca4805

My husband and I are both standard rate tax payers. We have a large sum of money to invest following the sale of a property. We've been investigating Martin's "5% loophole" and plan to do that using the max in each current account. However, I understand that from April '16 the first £1,000 of interest is tax free. My question is this: when we have reached the £1,000 each threshold, is it then better to carry on earning more interest via the high interest current accounts involved in the loophole or get ISAs with much lower interest rates which are tax free? I'm new to all this - never had much money before! - and would appreciate any feedback.

kidmugsy

The advantage of the ISA would be if you planned to keep money there for a long time - until, say, "loss leader" current accounts had vanished. Otherwise you're better off making 3%, 4%, or 5% p.a. and paying the 20% tax on it, than earning, say, 1.3% p.a. in an ISA.

Of course, if you really intend to 'invest' the money for the long term, then S&S ISAs might appeal. Or even pension contributions in a couple of years time perhaps.

bowlhead99

You said you are standard rate taxpayers and presumably you know what that standard rate is, once you've used up all your personal allowances and savings interest allowances. If not, the figure is 20%.

So, is it better to earn say £300 on £30,000 in ISAs which offer 1% tax free interest? Or is it better to earn £900 on £30,000 in higher interest accounts which offer 3% taxable interest, and simply owe the tax man 20% of the £900 that you got, which is only £180? It sounds better to me to do the latter.

You don't mention how much you have in total, other than it being more than you ever had, and you don't mention if you have plans to use it up on something else in the next few years.

Maybe the amount is big enough to be able to max out your annual ISA allowances for the next few years, and if you're unlikely to need the money, it might not hurt to use up the very best current accounts first and then also max your ISA allowances for this year (a "use it or lose it" allowance) as part of a plan to gradually move cash into places that don't incur tax.

This is because as kidmugsy says, at some point if/when the rates on ISAs improve, the tax protection can be more useful and it can take many years to "wrap up" (say) £200k in ISAs if you can only do £30k a year between you.

rebecca4805

Hi that is what I thought, especially as it's only going to be for a year or so, until it is used for a house purchase. Thanks so much for your thoughts.