question about savings, isas, PSA, etc...

javixeneize

Hi

I have a question regarding ISAs and saving accounts. I have seen the typical champagne tower, but there is something that is unclear to me
The question is... what is the best approach... put money in a saving account or in an ISA account?

Probably the question would be, saving account, but... what if you are close to the PSA limit?

Imagine this situation... you are 5k beyond the PSA limit, and your saving account gives you a 1.45%. You have 20k allowance on an ISA that gives you 1.15%
Should you put the money in the ISA, as every year it will give you a bigger return (given the 20k allowance) , or should you fill the savings account first, and then fill the ISA?

Thanks

Nuggy96

fill the savings account, you get a 1k tax free allowance on interest gained from bank accounts

polymaff

As you are aware, it all depends on your tax profile during the life of the investment - and beyond.

So 1.45% is really only 1.16% to a basic rate tax-payer, and only 0.87% to a higher rate tax-payer - once you have consumed your personal allowances and made use of your nil-rate savings band(s), the latter ranging from £0 to £6,000.

The other thing not often considered is the effect of inheritance. If a spouse dies then the survivor may well see their income increase significantly.  Better that as much as possible of that increase is tax-free.

Dazed_and_C0nfused

It is £1,000 taxed at 0%.  Which makes a difference for some people.

And don't forget about the savings starter rate of tax where upto £5,000 of taxable interest is also taxed at 0%.  Not everyone can use that but plenty can and that has to be used before you can use the £1,000 tax band.

javixeneize

Dazed_and_C0nfused said:

It is £1,000 taxed at 0%.  Which makes a difference for some people.

And don't forget about the savings starter rate of tax where upto £5,000 of taxable interest is also taxed at 0%.  Not everyone can use that but plenty can and that has to be used before you can use the £1,000 tax band.

Hi

is the PSA set to £1000? I thought it was £500 if your. Income was over £50,000 isn’t it?

javixeneize

polymaff said:

As you are aware, it all depends on your tax profile during the life of the investment - and beyond.

So 1.45% is really only 1.16% to a basic rate tax-payer, and only 0.87% to a higher rate tax-payer - once you have consumed your personal allowances and made use of your nil-rate savings band(s), the latter ranging from £0 to £6,000.

The other thing not often considered is the effect of inheritance. If a spouse dies then the survivor may well see their income increase significantly.  Better that as much as possible of that increase is tax-free.

Thanks for the answer.

considering no inheritance and that I will be close to the £500 limit for tax free savings income... what would be my best option?

Dazed_and_C0nfused

javixeneize said:

Dazed_and_C0nfused said:

It is £1,000 taxed at 0%.  Which makes a difference for some people.

And don't forget about the savings starter rate of tax where upto £5,000 of taxable interest is also taxed at 0%.  Not everyone can use that but plenty can and that has to be used before you can use the £1,000 tax band.

Hi

is the PSA set to £1000? I thought it was £500 if your. Income was over £50,000 isn’t it?

It can be £0, £500 or £1,000.  You have to work out if you are a higher rate (or additional rate) payer ignoring this rate band and then once you know that you will know if it's £0, £500 or £1,000.  

You can be classed as a higher rate payer and be entitled to £500 but then not actually pay any higher rate tax 

javixeneize

Where can I find that info? That’s news to me, as I thought it was based on your income

thanks

bowlhead99

javixeneize said:

Where can I find that info? That’s news to me, as I thought it was based on your income

thanks

It is based on your income (all your income, including interest income, before considering how much personal savings allowance you have).

https://www.gov.uk/apply-tax-free-interest-on-savings
____

Personal Savings Allowance

You may also get up to £1,000 of interest and not have to pay tax on it, depending on which Income Tax band you’re in. This is your Personal Savings Allowance.

To work out your tax band, add all the interest you’ve received to your other income.

Income Tax band	Personal Savings Allowance
Basic rate	£1,000
Higher rate	£500
Additional rate	£0

____

For example if you have 48000 salary and £500 of interest and £2000 dividends you will be in the higher rate band because your total income is £50500 and the higher rate band other than in Scotland starts at £37500 above your personal allowance and most people get £12500 of personal allowance meaning they're in the high rate band if total income is £50000+

If you did have that mix of income and that level of personal allowance, you would be paying tax at 0% on the first £12500 of your salary, 20% on your next 35500 of salary, nothing on the dividends and nothing on the interest. 

If you then earned another £1 of salary you would pay 20p tax on it;

 if you earned another £1 of interest you would pay 20p of tax on it (because you only get £500 of interest income at 0% because your total income is in the higher rate band, but the interest itself falls to be taxed at 20%); 

if you earned another £1 of dividends you would pay 32.5% tax on it(because you only get £2000 of dividends at 0% and dividend income is taxed as the top 'slice' of your total income and dividend income within the higher rate band gets taxed at 32.5%.

tropic_of_Username003

bowlhead99 said:

if you earned another £1 of dividends you would pay 32.5% tax on it(because you only get £2000 of dividends at 0% and dividend income is taxed as the top 'slice' of your total income and dividend income within the higher rate band gets taxed at 32.5%.

I agreed with you completely until this point, but I think this bit isn't quite right.

Because in this situation, your personal allowance would no longer be used to take £12,500 of salary out of tax, but instead to take £12,499 of salary and £1 of dividends out of tax. Then you would pay 20% tax on the remaining £35,501 of salary, 0% on the £500 interest, and 0% on the remaining £2,000 of dividends.

So you only pay 20p extra income tax, not 32.5p.

The principle is that your personal allowance is allocated against whatever kind of income it's most beneficial to the taxpayer to allocate it.

Unfortunately, this adds a whole extra layer of complexity to income tax.

Dazed_and_C0nfused

tropic_of_Username003 said:

bowlhead99 said:

if you earned another £1 of dividends you would pay 32.5% tax on it(because you only get £2000 of dividends at 0% and dividend income is taxed as the top 'slice' of your total income and dividend income within the higher rate band gets taxed at 32.5%.

I agreed with you completely until this point, but I think this bit isn't quite right.

Because in this situation, your personal allowance would no longer be used to take £12,500 of salary out of tax, but instead to take £12,499 of salary and £1 of dividends out of tax. Then you would pay 20% tax on the remaining £35,501 of salary, 0% on the £500 interest, and 0% on the remaining £2,000 of dividends.

So you only pay 20p extra income tax, not 32.5p.

The principle is that your personal allowance is allocated against whatever kind of income it's most beneficial to the taxpayer to allocate it.

Unfortunately, this adds a whole extra layer of complexity to income tax.

Understatement of the year