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

MoneyMan01

I'll be honest, that sum confuses me.

How can adding 20% to 1.4 equal 1.68, but minusing 20% from that number not equal 1.4? I know that what you have put is correct, it's just confusing to me.

Initially I looked at what you put and thought basically "To make more, once you have gone over the £1,000 allowance, you would need a savings account paying 1.68% if your cash ISA is paying 1.4%".

But then given your calculations above that isn't the case.

So.. Based on if I put money into a 3% cash ISA, then after I reached the £1,000 allowance, anything above I put into a savings account, that savings account would need to pay 3.75%, is that right?

AmityNeon

TheDarkKnight93 said:

I'll be honest, that sum confuses me.

How can adding 20% to 1.4 equal 1.68, but minusing 20% from that number not equal 1.4? I know that what you have put is correct, it's just confusing to me.

20% of 100 is 20.
Add 20% to 100 = 120.

20% of 120 is not 20, so when you subtract 20% from 120, the result is not 100.
(120 - 24 = 96)

TheDarkKnight93 said:

So.. Based on if I put money into a 3% cash ISA, then after I reached the £1,000 allowance, anything above I put into a savings account, that savings account would need to pay 3.75%, is that right?

Yes. Just to be clear, interest from an ISA is not taxable income, so it doesn't use up any part of the allowance.

MoneyMan01

Thank you so much for all of the information. 

What sum would I need to do, to work out the interest rate I would need on my savings, to make it worthwhile on a 40% tax bracket? 

jimjames

Th original question is all a bit irrelevant now as cash ISA rates are higher than savings accounts so that would be the first port of call if you haven't used it yet

gravel_2

MoneyMan01 said:

Thank you so much for all of the information. 

What sum would I need to do, to work out the interest rate I would need on my savings, to make it worthwhile on a 40% tax bracket? 

If you already use up your PSA with normal savings, simply multiply the ISA rate by 1.67 to see the equivalent non-ISA rate for the same return after deduction of tax.

As above it's not useful for the original purpose of this thread as the market is different and ISA/non-ISA rates so close, but it's still good to know what the ISA would cost you if not in the wrapper.

MoneyMan01

Sorry, I should of clarified that I have now maxed my ISA allowance.

So, I'll word my question differently.

What sum do I do, on an interest rate outside of PSA, to figure out what actual percentage return I am getting, after tax.

Let's say there is a savings account paying 5%. I am in the 40% tax bracket, and have used up my PSA. What is the sum I do to work out my actual % return?

gravel_2

MoneyMan01 said:

Sorry, I should of clarified that I have now maxed my ISA allowance.

So, I'll word my question differently.

What sum do I do, on an interest rate outside of PSA, to figure out what actual percentage return I am getting, after tax.

Let's say there is a savings account paying 5%. I am in the 40% tax bracket, and have used up my PSA. What is the sum I do to work out my actual % return?

Because of PSA it's easier (for me) to work backwords.

I have a spreadsheet of all interest bearing accounts, which predicts the amount of annual interest. Then I use this formula to work out the amount of tax to pay:
=MAX(0,(-500+[INTEREST EARNED])*40%). Then you can work this back up to establish the proportion of tax paid for each account and ultimately the effective % return after tax.

If you want rough and tough not accounting for PSA, just reverse what I said in the post above. Divide the non-ISA % by 1.67. So a 5% account would be equivalent to ~3% after tax.

Dazed_and_C0nfused

MoneyMan01 said:

Sorry, I should of clarified that I have now maxed my ISA allowance.

So, I'll word my question differently.

What sum do I do, on an interest rate outside of PSA, to figure out what actual percentage return I am getting, after tax.

Let's say there is a savings account paying 5%. I am in the 40% tax bracket, and have used up my PSA. What is the sum I do to work out my actual % return?

In most cases you just deduct 40%.

So 5.2% is really 3.12% after tax.

But as you are hopefully aware there is no separate "allowance" for interest, above your Personal Allowance it will all be taxed, albeit the first £500 at a 0% tax rate.

But that £500 can increase any High Income Child Benefit Charge payable and increase the tapering of the Personal Allowance so the tax impact can be well above 40% in these situations.

MoneyMan01

Yes, I am aware of the “allowance”.

Was just looking for the actual sum, if someone could type it out?

If the interest rate of a savings account was 5%, would the sum be:

5 divided by 1.67? That shows as 2.99% for me? Would that be correct?

Growingold

When you transfer your ISA what you have taken out  but not replaced has lost its tax free status.  The tax free status will only apply to what is actually transferred.

Put simply if you had £60.000 in your ISA in total this tax year and being flexible withdrew £40.000 then £20,000 would be transferred and you couldn't put the £40,000 back  into your new ISA.
If you want to keep the tax free status of the £60,000 then you would have to replace it in your current ISA before transferring.