Top Cash ISAs Discussion Area

ritac1

Thankyou.

He doesnt have an ISA this year yet.

Would it matter if he lost the tax free status since he is not a tax payer?

System

ritac1 wrote: »

Thankyou.

He doesnt have an ISA this year yet.

Would it matter if he lost the tax free status since he is not a tax payer?

I assume he will become a tax payer at some point, so if he intends to save for the long term, then anything he can save in an ISA will enable him to reap the rewards of the tax free status in future years (when he starts to pay tax)

Baldur

ritac1 wrote: »

Thankyou.

He doesnt have an ISA this year yet.

Would it matter if he lost the tax free status since he is not a tax payer?

There are two elements to this - 1) as BAA1 has said, the tax-free status of Cash ISA funds are ongoing while they remain in an ISA account (at least for as long as the ISA scheme lasts).

2) If just considering the short-term, does his 'ordinary' savings account pay better interest than the best available Cash ISA which accepts ISA transfers?

ritac1

Baldur wrote: »

There are two elements to this - 1) as BAA1 has said, the tax-free status of Cash ISA funds are ongoing while they remain in an ISA account (at least for as long as the ISA scheme lasts).

2) If just considering the short-term, does his 'ordinary' savings account pay better interest than the best available Cash ISA which accepts ISA transfers?

Sorry to keep on with this but there are some points I am struggling with.

1. Assuming then that he withdraws the funds from the Cash ISA and does not become a tax payer until say 2015 - what happens then? When he becomes a tax payer will he have to pay tax on the interest he has received during last tax year? If that is the case, I assume he will always need to keep an ISA (whilst ever the ISA sceme is in operation) in order to have the interest received prevously as tax free?

2. His ordinary savings account (which is the Santander e-saver issue 3) is a lesser interest rate than their latest Cash ISA.

Thanks for your patience in explaining.

System

For ordinary savings accounts, tax is only due on the interest earned during the tax year in question so he would not be back taxed on previous years interest when he becomes a tax payer in say 2015.

So, if he had saved say £25,000 in an ordinary savings account by 2015, then the interest on that £25,000 could be say £750 in the 2015 tax year so he would pay approx. £150 tax - maybe.

But, if he had saved that same £25,000 in an ISA, he would still get the same interest of £750 but there would be no tax to pay.

Remember that in 2015 he will NOT be able to move the £25,000 from an ordinary savings account back into an ISA because of the annual limit imposed on ISA accounts. (£5340 this year)

P.S.
Also remember that banks will automatically deduct tax at 20% from interest on ordinary savings accounts. So, he would have to complete an R85 form from the bank to stop the tax deduction (Or claim it back from HMRC at the end of each year)

Baldur

ritac1 wrote: »

1. Assuming then that he withdraws the funds from the Cash ISA and does not become a tax payer until say 2015 - what happens then? When he becomes a tax payer will he have to pay tax on the interest he has received during last tax year? If that is the case, I assume he will always need to keep an ISA (whilst ever the ISA sceme is in operation) in order to have the interest received prevously as tax free?

He would be taxed on any earnings/savings (other than tax-free ones, like ISAs/NS&I certificates and similar) in any tax year when his income exceeds his personal allowance.

2. His ordinary savings account (which is the Santander e-saver issue 3) is a lesser interest rate than their latest Cash ISA.

The e-Saver Issue 3 only offers the same rate (3% AER) as the Halifax ISA Direct Reward 4, which accepts ISA transfers, so he would be no better off by withdrawing the old ISA funds than by transferring them and maintaining their tax-free status (including any accrued interest).

He would, however, be better off by withdrawing the e-Saver funds and using them to open & subscribe to the Santander Flexible ISA @ 3.3% and could, if he transfers the old one to Halifax, potentially have two tax years'-worth of Cash ISA funds earning tax-free interest.

ritac1

BAA1 wrote: »

For ordinary savings accounts, tax is only due on the interest earned during the tax year in question so he would not be back taxed on previous years interest when he becomes a tax payer in say 2015.

So, if he had saved say £25,000 in an ordinary savings account by 2015, then the interest on that £25,000 could be say £750 in the 2015 tax year so he would pay approx. £150 tax - maybe.

But, if he had saved that same £25,000 in an ISA, he would still get the same interest of £750 but there would be no tax to pay.

Remember that in 2015 he will NOT be able to move the £25,000 from an ordinary savings account back into an ISA because of the annual limit imposed on ISA accounts. (£5340 this year)

I pretty much understand the basics of how it works. I just cant seem to find out what would happen, say if he withdrew the funds from last years CASH ISA and spent it, deposited it in another account (non ISA), whatever, - what would be the penalty for him doing that with relation to the interest he has already received. Bearing in mind that he is not a tax payer right now but will be when he is working after completing his studies.

Baldur

ritac1 wrote: »

I pretty much understand the basics of how it works. I just cant seem to find out what would happen, say if he withdrew the funds from last years CASH ISA and spent it, deposited it in another account (non ISA), whatever, - what would be the penalty for him doing that with relation to the interest he has already received. Bearing in mind that he is not a tax payer right now but will be when he is working after completing his studies.

There is no penalty - we are simply pointing out the future benefits, which would be lost.

ritac1

Baldur wrote: »

There is no penalty - we are simply pointing out the future benefits, which would be lost.

Thank you for your patience. I thought that there might be a penalty/disadvantage.:T

black_taxi_2

do you get better rates on cash isa--yearly lump sum rather than regular savings?