Do I need an isa before investing?

mikeopvc

Hi, I’m looking for advice on where best to put some money.

I’ve a few grand which I won’t need for a while possibly a year or two but am not sure what’s best to do, I’ve read a few threads on here and there’s a couple of people saying to open up a Nationwide Flexdirect current account and also a TSB Classic Plus current account then set up standing order from one to the other etc. That seems sensible as they are currently the best rate accounts but should I have an isa before doing this?
I’ve never had an isa before as I didn’t have much spare cash so didn’t bother.
I’ve also put 1k each into three peer to peer sites as I’ve been following a couple of threads on here about them so thought I’d have a dabble, I’m also intrigued by the idea of investing so have been following yet more threads on here relating to this which have led me onto the Vanguard website, while on there looking at tracker funds I came across the stocks and shares isa so was wondering if that’s something to consider?

Apologies for a bit of a confusing first post but I am actually confused by it all, I’m sure there’s loads more info I need to give before I can receive advice but am not sure exactly what so thought it best to see what questions people have, if any?

Thanks for reading and I look forward to any input.

MallyGirl

If you are only thinking a year or 2 then you are looking at saving, not investing in stocks and shares.
An ISA is useful to avoid paying tax on gains or interest but interest on 'a few grand' won't incur tax anyway.
I'd stick to the 2 5% current accounts mentioned - the nationwide one gives access to a 5% regular saver too.

PRAISETHESUN

In my opinion, you only really need an ISA if you are likely to earn over the tax-free allowance for interest (£1000 per tax year for basic rate). There is no advantage to having one if you can't take advantage of the tax savings, particularly since they typically pay poor rates.

As for P2P and stock investing - these are higher-risk activities and you should make sure you know what you are doing before you put a lot of money into these platforms. Just because they have performed well in the past doesn't necessarily mean they are going to keep doing so. These platforms, in particular stocks, usually require a 5+ year time frame in order to maximise profit and minimise risk so not the sort of thing for everyday folks with a few grand to save - you're better of sticking to safer cash products such as those you've mentioned.

mikeopvc

Thanks for the quick replies, ok so only go for an isa once my interest is to be more than 1k per year.
So with the max in the two 5% accounts and also the 5% regular saver, and the 3k in p2p I guess I’m still way off achieving the 1k yearly interest then?

londoninvestor

If you don't have a cash ISA, and you're planning to invest in stocks and shares, you might as well open an S&S ISA. There is usually no extra fee; your ISA allowance is use-it-or-lose-it; and it simplifies the records that you would need to keep for capital gains tax calculation if you held S&S outside an ISA.

(But as stated, stocks and shares are not a good idea for money you expect to need in a year or two.)

mikeopvc

londoninvestor wrote: »

If you don't have a cash ISA, and you're planning to invest in stocks and shares, you might as well open an S&S ISA. There is usually no extra fee; your ISA allowance is use-it-or-lose-it; and it simplifies the records that you would need to keep for capital gains tax calculation if you held S&S outside an ISA.

(But as stated, stocks and shares are not a good idea for money you expect to need in a year or two.)

Ok thanks, so if I need funds in a year or two then I can just use the cash I will have in nationwide, tsb and p2p.

So with any other spare money I have would it be a good idea to put it into the vanguard s&s isa or is there a better alternative?

Dazed_and_confused

so only go for an isa once my interest is to be more than 1k per year.

Some basic rate payers can earn up to £5,999 in interest before any tax is payable on the interest.

It all depends on what your other income is.

Which we don't know. So whether the £1,000 savings nil rate of tax (aka PSA) is even something you can make use (lower earners can't) is an unknown.

KeepOnKnitting

mikeopvc wrote: »

Ok thanks, so if I need funds in a year or two then I can just use the cash I will have in nationwide, tsb and p2p.

So with any other spare money I have would it be a good idea to put it into the vanguard s&s isa or is there a better alternative?

Only put money into the S&S ISA if you won't need it for 5+ years. S&S are for long term investing. If you need it sooner, find another high-interest account, not S&S.

mikeopvc

Dazed_and_confused wrote: »

Some basic rate payers can earn up to £5,999 in interest before any tax is payable on the interest.

It all depends on what your other income is.

Which we don't know. So whether the £1,000 savings nil rate of tax (aka PSA) is even something you can make use (lower earners can't) is an unknown.

I’m self employed on a basic salary so that should mean I’m a basic rate payer, how do I know if I qualify to earn up to £5,999 in tax free interest?

mikeopvc

KeepOnKnitting wrote: »

Only put money into the S&S ISA if you won't need it for 5+ years. S&S are for long term investing. If you need it sooner, find another high-interest account, not S&S.

I’m happy to leave some in for 5+ years, say 2 or 3k at the start and maybe set up a standing order to pay in a small amount each month, so on that basis would the vanguard s&s isa be a good choice?

Dazed_and_confused

You would need to have just £1 of your income taxed at basic rate (or starter rate if you are Scottish resident for tax purposes).

There are two things which apply before the savings nil rate (PSA) comes into play.

Firstly your Personal Allowance has to be used up.

Secondly the savings starter rate of tax has to be used up. This can happen in one of three ways.

1. Your earned income (wages, business profits, rents etc) is high enough that it uses up your Personal Allowance and an additional £5,000 of your basic rate band.
2. Your earned income is less than your Personal Allowance and savings interest uses up your remaining Personal Allowance and the £5,000 savings starter rate of tax
3. Your earned income uses all of your Personal Allowance and part of the savings starter rate. It is this situation which might apply to you. More realistic example below for 2019:20 tax year.

Profits £15,500
Interest £1,500
Taxable income £17,000

Tax on profits is calculated as £15,500 - £12,500 Personal Allowance = £3,000 x 20% = £600 (assuming you aren't Scottish resident for tax purposes)

Tax on interest is £1,500 x 0% (savings starter rate).

So in this situation you cannot make use of the £1,000 savings nil rate (PSA).

If you had an extra £1,501 interest it would be taxed
£500* x 0% (savings starter rate)
£1,000 x 0% (savings nil rate)
£1 x 20% (savings basic rate)

* the savings starter rate band of £5,000 has been used by £3,000 of the earned income and £2,000 of the savings interest