Tax on your savings - When to get an ISA

ste_mill

Each month I move some of my savings into different banks to take advantage of the better interest rates like Club Lloyds etc.

I know you can earn up to £1000 in interest without being taxed on it, so is there an easy way to work out if I will hit that limit so that I can move some of the savings into an ISA.  I don't think I will hit it, but it would be nice to know how far off I am.

Thanks

eskbanker

If you're shunting money around regularly then there won't be any handy shortcut to ascertaining how much interest you're earning from non-ISA accounts, i.e. you'd need to rely on monthly statements where available, or working out the interest yourself on a spreadsheet.

The fact that tax may be payable if you exceed £1K of interest in non-ISA accounts doesn't in itself mean that moving to an ISA is the best response, you should always consider what gives the best net return, which may sometimes be taxable accounts....

TiVo_Lad

I'm assuming you're not a higher rate tax payer. ISAs often make sense if you do pay higher rate tax, or may do in the future (fiscal drag is hauling more and more people into the high rate bucket each year). Savings in an ISA retain their tax-free status irrespective of your marginal tax band, whereas more of your taxable savings interest gets taxed as your earnings rise.

ISAs generally have lower interest rates at the moment, so factor that in as well. A 3% ISA gives the same real-world return as a 5% taxable savings account if you're a higher rate (40%) taxpayer in England and Wales; slightly higher (5.17%) for Scottish higher rate (42% in FY23/24) taxpayers.

Albermarle

ste_mill said:

Each month I move some of my savings into different banks to take advantage of the better interest rates like Club Lloyds etc.

I know you can earn up to £1000 in interest without being taxed on it, so is there an easy way to work out if I will hit that limit so that I can move some of the savings into an ISA.  I don't think I will hit it, but it would be nice to know how far off I am.

Thanks

You can earn more than £1000 tax free interest if you are a low earner ( < £17570 pa ) 

Notepad_Phil

If you multiply the maximum amount of money that you will have in interest bearing accounts by the best interest rate you have then you can check to see whether you have any need to worry and do further checks to see what your interest will really be.

E.g. if you have £20,000 in savings accounts and the best account is 4% then £20,000 x 0.04 = £800. I.e. you'll have a maximum total of £800 interest. It could be smaller if you're using other accounts paying smaller rates or don't have the money in for the full tax year. Alternatively it could turn out to be higher if the interest rate is increased over the year.

If you think you're likely to get close to £1,000 then many of the people on here would use a spreadsheet to note and/or calculate the amounts of interest that are being paid.

Indout96

Just to throw a spanner in the works does anyone know how they calculate the interest on a 12 month fixed account which pays at the end of the year ?
My wife has a 1 year fix which matures this September however half the interest will have been earnt in year 2022/2023 and half in 2023/2024 so do they look at it this way or is it all taxed in the year its paid ? 
We normally go for monthly interest but clicked the wrong box on this one 

razord

Indout96 said:

Just to throw a spanner in the works does anyone know how they calculate the interest on a 12 month fixed account which pays at the end of the year ?
My wife has a 1 year fix which matures this September however half the interest will have been earnt in year 2022/2023 and half in 2023/2024 so do they look at it this way or is it all taxed in the year its paid ? 
We normally go for monthly interest but clicked the wrong box on this one 

Taxed on the date it's paid, not split over the period it's earned I'm afraid.

Notepad_Phil

Indout96 said:

Just to throw a spanner in the works does anyone know how they calculate the interest on a 12 month fixed account which pays at the end of the year ?
My wife has a 1 year fix which matures this September however half the interest will have been earnt in year 2022/2023 and half in 2023/2024 so do they look at it this way or is it all taxed in the year its paid ? 
We normally go for monthly interest but clicked the wrong box on this one 

It will be taxed in the year that the interest is notified to the HMRC - which with a non- monthly 1 year fix is going to be when the interest is paid at the end of the year.

TiVo_Lad

What @razord and @Notepad_Phil said.

You need to be careful with accounts that span multiple tax years because you can end up paying tax on the interest for a multi-year fix which you wouldn't pay if you fixed for a year and then refixed. The multi-year fix crystalises the taxable interest in one go (the maturity date) whereas multiple year-long fixes allow you to spread the interest over multiple tax years.

eskbanker

TiVo_Lad said:

What @razord and @Notepad_Phil said.

You need to be careful with accounts that span multiple tax years because you can end up paying tax on the interest for a multi-year fix which you wouldn't pay if you fixed for a year and then refixed. The multi-year fix crystalises the taxable interest in one go (the maturity date) whereas multiple year-long fixes allow you to spread the interest over multiple tax years.

Some multi-year fixes pay interest at maturity, but others pay annually or even monthly....

https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/#fixedsavings

Notepad_Phil

TiVo_Lad said:

What @razord and @Notepad_Phil said.

You need to be careful with accounts that span multiple tax years because you can end up paying tax on the interest for a multi-year fix which you wouldn't pay if you fixed for a year and then refixed. The multi-year fix crystalises the taxable interest in one go (the maturity date) whereas multiple year-long fixes allow you to spread the interest over multiple tax years.

Though it would seem to appear (from my experience and from Google searches on other people's experience)  that even when you've left the interest to accrue in the account, most companies still report the interest on multiple-year fixed accounts every year (unless they've specifically stated otherwise) - even though at least some of the HMRC documentation would tend to indicate that they are wrong to do so.

If you want to completely avoid the possibility then assuming you have the option, you can pay the interest out of the account on a monthly or annual basis and know exactly when the interest is reported.