What is ISA and tax-free savings?

Sooner

I have significant savings and it seems I get taxed on interest. I have know idea what ISA is and how to have tax-free savings. Can someone give me a short overview? I don't want to read a huge article or something. Also, are we talking about significant profits, or just £80 gains per year maximum? I wouldn't bother for that.

Zanderman

Sooner wrote: »

I have significant savings and it seems I get taxed on interest. I have know idea what ISA is and how to have tax-free savings. Can someone give me a short overview? I don't want to read a huge article or something. Also, are we talking about significant profits, or just £80 gains per year maximum? I wouldn't bother for that.

All savings interest is paid tax-free - and has been paid tax-free for a year or two now.

You are liable for tax on any interest totalling over £1000 (if a basic rate tax payer - different rates apply if you're a higher rate tax payer) but that's done via your tax return. So you're only being taxed on it if you declare it and if the total is more than £1000.

ISAs are special savings accounts that are not liable for tax, even if the interest totals over £1000.

But interest rates on ISAs are tiny compared to interest rates on many interest paying curent accounts and regular savings accounts so the tax-free status may be not worth having.

Unless, of course, your 'significant' savings are so significant that they earn you over £1000 per year. But they would, at present interest rates, need to be really very significant for that.

ViolaLass

http://www.moneysavingexpert.com/savings/ISA-guide-savings-without-tax

elephantrosie

just deposit your money in one of the isas.

Keep_pedalling

elephantrosie wrote: »

just deposit your money in one of the isas.

But not a cash ISA, they have been pointless for a very long time now.

When you say significant can you be more specific? And what is your long term plan for these savings?

isasmurf

Keep_pedalling wrote: »

But not a cash ISA, they have been pointless for a very long time now.

As the PSA has only been in existence for 14 months, how have cash ISAs been pointless "for a very long time now"?

In any case, cash ISAs still have a role for some people.

Dazed_and_confused

Zanderman

You are liable for tax on any interest totalling over £1000 (if a basic rate tax payer - different rates apply if you're a higher rate tax payer) but that's done via your tax return. So you're only being taxed on it if you declare it and if the total is more than £1000.

You are still liable to tax on all savings interest (excluding the normal exceptions such as ISA's) all that has changed is that some is potentially now taxed at a rate of 0%. Very high earners and lots of lower income people are not going to be able to receive the personal savings allowance (although for the lower earners there is another tax rate band to mitigate this).

And for some in the middle there will be some nasty surprises as the amount taxed at the PSA rate is still taxable income so no income tax to pay but it can still contribute in reducing your personal allowance (income over £100k), reducing married couples allowance (elderly) or mean you have to pay some child benefit back.

Probably not an issue for the op but it will be for plenty of others. There's a cracking example on Martin's PSA blog about how a tiny bit of extra income can mean you are actually worse off overall!

Keep_pedalling

isasmurf wrote: »

As the PSA has only been in existence for 14 months, how have cash ISAs been pointless "for a very long time now"?

In any case, cash ISAs still have a role for some people.

Even before PSA came in ISA rates were so poor it was easy to do better elsewhere even after tax, at least as far as basic rate tax payers were concerned. What I find hard to understand is why so many people on this site seem to have maintained such high levels of cash savings for the long term.