Pay Interest on the "Over Tax Free Allowance" or Put the Extra Money into Cash ISA?

MoneyMan01

I am in the fortuante position of having savings which means I am earning the £1,000 interest per year. 20% tax bracket for work.

£10k in a savings account paying 3% (can't put any more in here otherwise it doesn't get 3%)

Around £21,500 in a savings account paying 2.75%

There is another account which has a small amount, but basically this means it equates to around £900 pear year in interest. I've done that so that I don't go over the £1,000 allowance until I have made a decision.

I have a Flexible Cash ISA which I can withdraw and move around unlimited amount of times, and that has built up to allowing me to deposit around £62,000 into it as I've built it up over the years. That is only paying 1.4% interest however. There is around £25,000 in there. Also got £12k in a HTB ISA with NW and £50,000 in Premium Bonds.

My question is, do I stop putting money into the savings accounts so that I don't pay any interest tax, and put the remaining money into the Cash ISA (which is what it is now) - Or do I put the £25,000 that is in the Cash ISA into the savings account and just pay the interest?

Which would work out better for me?

Thanks in advance.

eskbanker

If you're effectively asking if it's better to earn 1.4% in an ISA or 2.75% taxable, then the latter, with a net return of 2.2%, will be the higher-earning of those two options, but it's a false dichotomy really, in that you could consider transferring the cash ISA to a more competitive one that would change that evaluation....

MoneyMan01

If I transfer that ISA to one paying more, would that mean I then lose the £60,000 allowance I can currently put into it and the freedom to make unlimited withdrawals in it?

eskbanker

TheDarkKnight93 said:

If I transfer that ISA to one paying more, would that mean I then lose the £60,000 allowance I can currently put into it and the freedom to make unlimited withdrawals in it?

Is there any value in a substantial allowance if you don't have funds to take advantage of it, i.e. if you currently have a boosted £60K allowance then that would all need to be back in the ISA by April or it would be lost?  There are other flexible cash ISAs available though, so I doubt that the best one accepting transfers only pays 1.4%, but haven't done the legwork to find out!

AmityNeon

TheDarkKnight93 said:

If I transfer that ISA to one paying more, would that mean I then lose the £60,000 allowance I can currently put into it and the freedom to make unlimited withdrawals in it?

Replace the money first before transferring to another flexible ISA, e.g. Virgin Money which pays 3% (equalling your existing best rate but tax-free), though you need their current account first. You could then drip-feed into Regular Savings accounts if you wish.

MoneyMan01

What I do is I always transfer the money back into the Cash ISA before the next financial tax year so I keep the allowance.

I know the rates are low at the moment, but I don't have crystal ball. I do it just in case in the event rates do go up, I've got that wrapper there if needed.

I'll have to look into the other Flex Cash ISA's to see if I can make unlimited withdrawals, but if one pays 3% then that is like you say a no brainer.

If I were to drip feed into regular savings accounts, that will still count towards getting taxed though.

I'm at £900 now so I'm hesitant to go above that.

So that I can work it out on my own, what is the sum I should be doing to work out what would be best?

I did this:

If I earnt £1,600 in interest, minus 20% (£1,280 total).

1.4% of £25,000 in the Cash ISA means I get £350 interest tax free. So if I stopped my interest at £1,000, plus the £350, that would mean I am better off leaving it in the Cash ISA?

Being completely honest, I am struggling to work out what the sum should be so I can figure it out.

Should I be dividing something by 0.8% to work out the 20% tax that would be added?

Dazed_and_C0nfused

If you are a basic rate payer who pays basic rate tax on at least £5,000 of your earnings/pension income then the first £1,000 of any taxable interest will be taxed at 0%.

Anything above that will be taxed at 20% (unless you stray into higher rate territory).

So £1,600 would be taxed,

£1,000 x 0% = £0
£600 x 20% = £120

Total tax = £120

For simplicity (given the existing £900 you expect to get in taxable interest) then it's as simple as @eskbanker explained.

You just need your non ISA rate to be 25% more than your ISA rate for it to be worthwhile.

If ISA is say 3.00% then the non ISA needs to be 3.75% (3.00 + 25%) to at least equal it after accounting for tax.

AmityNeon

TheDarkKnight93 said:

I'll have to look into the other Flex Cash ISA's to see if I can make unlimited withdrawals, but if one pays 3% then that is like you say a no brainer.

If I were to drip feed into regular savings accounts, that will still count towards getting taxed though.

I'm at £900 now so I'm hesitant to go above that.

You would not be at £900 because you'd be transferring it all (£10,000 + £21,500) into the 3% flexible ISA, so all interest arising would be non-taxable. The regular savers would generate taxable income yes, potentially over your Personal Savings Allowance if you took advantage of all the top offers (4%+), but your overall net interest would still be more than if you kept your savings just in the ISA.

Qyburn

AmityNeon said:

TheDarkKnight93 said:

If I transfer that ISA to one paying more, would that mean I then lose the £60,000 allowance I can currently put into it and the freedom to make unlimited withdrawals in it?

Replace the money first before transferring to another flexible ISA, e.g. Virgin Money which pays 3% (equalling your existing best rate but tax-free), though you need their current account first. You could then drip-feed into Regular Savings accounts if you wish.

Virgin current account and ISA can be opened almost at the same time.  Either same day, or next day, I can't remember. But it was only two or three days from start to my transfer from Paragon completing.

MoneyMan01

Thank you for the info all.

So just so I am clear, I should do whatever the rate is of the Cash ISA (in my case 1.4% at the moment), and then + 25% to it? Why would that be +25% and not +20% (what the tax on it would be)?

Dazed_and_C0nfused

It's 25% when you start with the net amount.

20% if you start with the gross.

1.4% + 25% = 1.75%
1.75% - 20% = 1.4%

1.4% + 20% = 1.68%
1.68% - 20% = 1.344%