When to put money in ISA v Savings Accounts

pptdgc

I'm trying to make the most of my savings as my house purchase fell through so now I'm holding on for a bit. I'm trying to spread my savings over some different savings accounts to try and get the best interest rates.

I release at some point the tax I pay might be high enough that it might be better to start putting some in an ISA. Is there a calculator available to tell me how much I should put in Savings v an ISA?

Thanks

eskbanker

You can pay up to £20K into ISAs in any tax year, but beyond that it's entirely up to you how much to put into taxable accounts versus ISAs - it's generally best to consider it from the perspective of optimising net return rather than aiming to avoid tax as such, i.e. some taxable accounts will give you a better return even after tax than some ISAs.

VXman

You can earn up to £1000 in savings interest before paying tax on the interest. So taking a fictional amount of say 2% savings rate - you would hit that £1000 if you kept £50,000 in for a year. If you put it in a 1 year fixed savings account you'd hit that much quicker. 4.5% interest you'd only be able to save around £20,000 before you started getting near to the £1000 threshold.

It would make sense to put it some into an ISA depending on house much you have and how much the rate is.

pptdgc

Thanks, both for the help. Is the £1000 savings interest allowance per year? 

How does it work with paying the tax on the savings interest? Let's say I had 80k spread across 4 different savings accounts. I'm assuming I start paying tax on the interest once the sum of my interest across these 4 accounts reaches £1000 for the given year? How is this therefore calculated and the tax applied?

Albermarle

pptdgc said:

Thanks, both for the help. Is the £1000 savings interest allowance per year? 

How does it work with paying the tax on the savings interest? Let's say I had 80k spread across 4 different savings accounts. I'm assuming I start paying tax on the interest once the sum of my interest across these 4 accounts reaches £1000 for the given year? How is this therefore calculated and the tax applied?

It is per tax year. The interest is reported to HMRC by the providers and at some later stage they will charge you extra tax or adjust your tax code in later years to recover it.
Here is another thread on the subject
Savings Interest Tax Payment — MoneySavingExpert Forum

pptdgc

Albermarle said:

pptdgc said:

Thanks, both for the help. Is the £1000 savings interest allowance per year? 

How does it work with paying the tax on the savings interest? Let's say I had 80k spread across 4 different savings accounts. I'm assuming I start paying tax on the interest once the sum of my interest across these 4 accounts reaches £1000 for the given year? How is this therefore calculated and the tax applied?

It is per tax year. The interest is reported to HMRC by the providers and at some later stage they will charge you extra tax or adjust your tax code in later years to recover it.
Here is another thread on the subject
Savings Interest Tax Payment — MoneySavingExpert Forum

Thanks for confirming. I think I understand now so as I understand it: 

In the tax year (starting in April) I will only pay tax on savings interest once the total interest earned =  £1,000 (for 20% tax rate payers) or once it reaches £500 (40% tax rate-payers). HMRC will likely change my tax code so I pay the additional tax in the following year's pay?

In that case, I've already reached this limit for this year so now trying to work out whether to move money. I was just looking at this calculation on MSE...

Take the rate on the ISA you're looking at and multiply it by:

- 1.25 if you're a basic-rate taxpayer
- 1.66 if you're a higher-rate taxpayer
- 1.82 if you're a top-rate taxpayer

The result of that sum is the rate you need to get on normal savings for it to be the winner vs the cash ISA equivalent. If normal savings don't pay more than that, you're better off in the cash ISA. 

The best easy-access ISA I can find is around 2.5%, so I'd need a savings account of 3.125% or more for it to be more beneficial in a Savings account?

Sounds like it's at least worth using my ISA allowance for the year (and next) and putting the remaining amounts in the highest-interest savings accounts I can find.

Albermarle

Sounds like a plan.

Band7

pptdgc said:

The best easy-access ISA I can find is around 2.5%, so I'd need a savings account of 3.125% or more for it to be more beneficial in a Savings account?

The Virgin 3% easy access ISA is still available 
https://uk.virginmoney.com/savings/products/easy_access_cash_isa_exclusive_issue_2/

Dazed_and_C0nfused

VXman said:

You can earn up to £1000 in savings interest before paying tax on the interest. So taking a fictional amount of say 2% savings rate - you would hit that £1000 if you kept £50,000 in for a year. If you put it in a 1 year fixed savings account you'd hit that much quicker. 4.5% interest you'd only be able to save around £20,000 before you started getting near to the £1000 threshold.

It would make sense to put it some into an ISA depending on house much you have and how much the rate is.

That is a little simplistic though.

You start off by being able to earn £18,570 in interest before any tax is actually payable on it.

And the £1,000 savings nil rate band is the final slice of that.  Which can only be used after all the Personal Allowance and any available savings starter rate band has been used.

We see a very wide range of posters on here, some who are never going to be in a position to use the £1,000 as they have insufficient income to use the Personal Allowance and savings starter rate band.  Through to those paying 45% tax who don't get any of the savings nil rate band.

As the op hasn't mentioned what other income they have it's impossible to know exactly what interest they can receive without incurring a tax liability on it.

pptdgc

Band7 said:

pptdgc said:

The best easy-access ISA I can find is around 2.5%, so I'd need a savings account of 3.125% or more for it to be more beneficial in a Savings account?

The Virgin 3% easy access ISA is still available 
https://uk.virginmoney.com/savings/products/easy_access_cash_isa_exclusive_issue_2/

Thank you.. I just signed up with Virgin and got this ISA.

pptdgc

Dazed_and_C0nfused said:

VXman said:

You can earn up to £1000 in savings interest before paying tax on the interest. So taking a fictional amount of say 2% savings rate - you would hit that £1000 if you kept £50,000 in for a year. If you put it in a 1 year fixed savings account you'd hit that much quicker. 4.5% interest you'd only be able to save around £20,000 before you started getting near to the £1000 threshold.

It would make sense to put it some into an ISA depending on house much you have and how much the rate is.

That is a little simplistic though.

You start off by being able to earn £18,570 in interest before any tax is actually payable on it.

And the £1,000 savings nil rate band is the final slice of that.  Which can only be used after all the Personal Allowance and any available savings starter rate band has been used.

We see a very wide range of posters on here, some who are never going to be in a position to use the £1,000 as they have insufficient income to use the Personal Allowance and savings starter rate band.  Through to those paying 45% tax who don't get any of the savings nil rate band.

As the op hasn't mentioned what other income they have it's impossible to know exactly what interest they can receive without incurring a tax liability on it.

My salary is my only income. I'm now in the higher rate tax band.

I have £100k approx of savings now, I originally had about £80k of it in a 2.1% savings account (from April) so think I will have used my allowance fairly quickly this year? The rest was in random accounts (low interest) or I've saved it up over this year.

I now have £32k in an ISA (3%) (my £20k allowance for year + £12k I transferred from another ISA)

The remaining amount is currently in a 3.1% savings account. 

I'm wondering if it may be beneficial to move a further £20k to an ISA in April when I can get another one?

Thanks