Tax on savings - fixed vs ISA 8 November 2022 at 1:21PM in Savings & investments 8 replies 272 views

DJ123

Hi all

I'm just trying to get my head around the tax rules on interest on savings and the best savings account to use to give the best return. I'd appreciate someone checking my working out . Let's say I have £30,000 in savings, and am a basic rate tax payer. Let's also say that the interest rate on a fixed rate savings account is 4.5%, and the interest rate on a cash isa is 3.8%.  

Interest gained on fixed rate savings account: £1,350

Interest gained on cash ISA: £1,140

I would then have to pay tax on £350 of the fixed account scenario, which would be £70. Then I would subtract that £70 from the £1,350, which would be £1,280. So, if I were to invest 100% of my savings in one or the other of those accounts, I should still go for the fixed account, as despite the tax that would be owed, £1,280 is more than £1,140. Have I got that right?

I suppose the smart thing to do (assuming the above calculations are correct), is to open up both accounts and bung as much as possible into the fixed before getting taxed, and the rest in the isa.

Thanks for any help and advice all

Andrew

eskbanker

Yes, your calculations do seem correct in comparing the net interest return for that particular scenario, although there are other factors that could come into play, such as the fact that the money is the ISA would be accessible before maturity if needed (unlike the taxable account) and also that the interest on the taxable account could tip you into the higher tax band if you were close to the threshold.  Also, the annual ISA contribution limit is only £20K so you obviously couldn't pay in £30K of new money anyway, so the above would only apply if at least £10K of that money was already in the ISA wrapper....

Dazed_and_C0nfused

Let's say I have £30,000 in savings, and am a basic rate tax payer. 

Are you a basic rate payer with some savings starter rate band available or just the savings nil rate (aka Personal Savings Allowance)?

Albermarle

Let's say I have £30,000 in savings, and am a basic rate tax payer. Let's also say that the interest rate on a fixed rate savings account is 4.5%, and the interest rate on a cash isa is 3.8%. 

You can have a fixed rate cash ISA, so to avoid confusion best to refer to Cash ISA savings and non ISA savings.

andyhicks88

Not to hijack the thread but it's a similar theme so I'll ask it here anyway. If one had 50k to decide what to do with right now, and was a basic rate tax payer, what would be the most savvy way to save this? Obviously an ISA will have to come in to play and fixed rate savings but, in what combination?

Is there a more savvy way to save (yes I know investing should come into play at these sorts of figures but I don't want it) this at the moment than taking out the Virgin EA ISA at 3% sticking 20k in there and then putting the rest in the highest possible monthly paying 'normal' fixed (1 or 2yr as that's all i want) rate account?

Or would it be better to go with a fixed ISA instead?   It just seems to me by doing this I'd get both the highest possible EA rate (with the added tax benefit of being an ISA) and also the highest possible Fixed rate as well, and if the latter paid monthly would still not generate enough interest to pass the savings allowance in current tax year or next tax year.

Or am i getting this horribly wrong and theres a better way of doing this?

Albermarle

If you do not need easy access to the money, you might as well get the fixed rate in the ISA as well, as it will be at least 1% higher.

DJ123

Dazed_and_C0nfused said:

Let's say I have £30,000 in savings, and am a basic rate tax payer. 

Are you a basic rate payer with some savings starter rate band available or just the savings nil rate (aka Personal Savings Allowance)?

Savings nil rate - but I was more just making sure I understood the concept of the tax side thanks

DJ123

Albermarle said:

Let's say I have £30,000 in savings, and am a basic rate tax payer. Let's also say that the interest rate on a fixed rate savings account is 4.5%, and the interest rate on a cash isa is 3.8%. 

You can have a fixed rate cash ISA, so to avoid confusion best to refer to Cash ISA savings and non ISA savings.

Thanks for that and duly noted 

Dazed_and_C0nfused

DJ123 said:

Dazed_and_C0nfused said:

Let's say I have £30,000 in savings, and am a basic rate tax payer. 

Are you a basic rate payer with some savings starter rate band available or just the savings nil rate (aka Personal Savings Allowance)?

Savings nil rate - but I was more just making sure I understood the concept of the tax side thanks

Savings starter rate is key for plenty of people, including lots of basic rate taxpayers.

But if you can't utilise that then it's relatively straightforward.

The first £1,000 is taxed at 0% and the reminder at 20%.

Where it gets trickier is if you are affected by HICBC, tapered Personal Allowance or tapered Married Couple's Allowance as the £1,000 taxed at 0% is still taxable income and forms part of your adjusted net income which can impact other parts of your tax liability.