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

Dazed_and_C0nfused

MoneyMan01 said:

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?

Not for me it wouldn't.  It would be 5 minus 40%.

MoneyMan01

I think it’s best I start a new thread. This one is very outdated and I haven’t transferred any ISA out. 

All I want to confirm is what the sum is to work out what the actual % of interest is on a savings account, after the allowance has been used, on a 40% tax bracket, and whether that sum is (based on the savings account offering 5%), as follows:

5 divided by 1.67 

Is that correct?

eskbanker

MoneyMan01 said:

I think it’s best I start a new thread. This one is very outdated and I haven’t transferred any ISA out. 

All I want to confirm is what the sum is to work out what the actual % of interest is on a savings account, after the allowance has been used, on a 40% tax bracket, and whether that sum is (based on the savings account offering 5%), as follows:

5 divided by 1.67 

Is that correct?

5 divided by 1.6666666 (recurring) would be more accurate but is an unnecessarily cumbersome way of expressing it IMHO - if you have 40% deducted from anything, you're left with 60%, so 5% multiplied by 0.6 = 3% is a simpler way of thinking of it (for me). 

gravel_2

I only use 1.67 because I'm actually doing this sum in reverse to work out the hypothetical equivalent rate that an ISA would be at if it was subject to income tax and having the same net positive impact on income.

If there's a simpler way to work it out in that direction, please let me know.

eskbanker

gravel_2 said:

I only use 1.67 because I'm actually doing this sum in reverse to work out the hypothetical equivalent rate that an ISA would be at if it was subject to income tax and having the same net positive impact on income.

If there's a simpler way to work it out in that direction, please let me know.

My personal preference would be to divide by 0.6 as that has a more obvious correlation with the tax rate, so seems simpler and more logical to me, but each to their own and obviously they ultimately give the same answer (ignoring the rounding error from using 1.67 instead of 1.6666 recurring).

MoneyMan01

5 divided by 0.6 gives me 8.333333, which can’t be right. 

5 - 40% = 3

It seems as though x - 40% is the sum, where is x is the interest rate offered.

eskbanker

MoneyMan01 said:

5 divided by 0.6 gives me 8.333333, which can’t be right. 

Unfortunately there are two separate strands of discussion going on in the thread - you're trying to calculate the net from the gross, but another poster is looking to derive the gross from the net!

MoneyMan01 said:

5 - 40% = 3

It seems as though x - 40% is the sum, where is x is the interest rate offered.

Indeed, it really is no more complex than that, if you're looking to ascertain net interest paid to a higher rate taxpayer who's used all allowances.