Interest in Saving Account

sarahtrini

Hi everyone,

Following this post I found on Money Saving Expert detailed below - does anyone know whether the interest accumulated in the normal saving accounts would have to be below the PSA before moving the sum back into an ISA? For example, let's say you earned £1,500 in interest which will be over your Personal saving allowance, will it still be taxable if you move it into an ISA before the end of the financial year?

Apologies if this is a silly question, any advice will be greatly appreciated. 

Post I found on MSE:

Play the system to max interest and keep ISA benefits

Taking this to its extreme, there's a nifty trick you could use to keep your money tax-free forever in an ISA while getting a higher interest rate for most of the year.

Let's say you have £50,000 in flexible ISAs, but other savings accounts pay higher interest that you want to take advantage of, and you don't want to lose your ability to keep £50,000 tax-free year after year as you can in a cash ISA (see Is the cash ISA worth it?). Plus remember the personal savings allowance means you can earn up to £1,000 in interest in non-ISA savings accounts each financial year tax-free.

Here's how:

1. At the start of the new tax year – so from 6 April – withdraw the ISA cash.
2. Put it in (several) high interest accounts (see our Top savings guide for the best deals).
3. Before 5 April the following year just put it back in the ISA to keep your tax protection.
   
4. Repeat the process again and again.
   

This means your money would be earning more interest for most of the year, whilst still keeping the long-term benefits of an ISA.

Catplan

From what you describe the interest is outside of the isa so would be taxable. It sounds to me like a flexible cash isa is being used, to keep the money eligible for isa. Moving it outside of the isa means any interest would be part of psa for that year and hence taxable.

sarahtrini

Catplan - Thank you very much.

Doctor_Who

does anyone know whether the interest accumulated in the normal saving accounts would have to be below the PSA before moving the sum back into an ISA?

You can't move the interest earned in the normal savings account 'back' to the flexible ISA since it didn't originate from the flexible ISA. You can only move back the original balance that you withdrew (the interest could be added, but it would count as new subscription).

For example, let's say you earned £1,500 in interest which will be over your Personal saving allowance, will it still be taxable if you move it into an ISA before the end of the financial year?

As Catplan says, since the interest came from money in a non-ISA account it is taxable. If you move the interest to an ISA it will count as new subscription.

I think that MSE 'nifty trick' will confuse more people than it helps. Money in an ISA should really stay within the ISA if you want it to be sheltered from tax. A flexible ISA is useful in emergencies when you need access and then want to return the balance without affecting your ISA allowance.

Qyburn

The "nifty trick" isn't aimed at reducing tax in the current year, it's intended to maximise interest earned outside the ISA, while still gaining this year's ISA allowance for future use.

It's only any use if your interest rate outside the ISA is higher even after accounting for tax.

Doctor_Who

Qyburn said:

The "nifty trick" isn't aimed at reducing tax in the current year, it's intended to maximise interest earned outside the ISA, while still gaining this year's ISA allowance for future use.

It's only any use if your interest rate outside the ISA is higher even after accounting for tax.

I suppose if you have a large sum in a flexible ISA and become a non-tax payer it might be beneficial to do this. However, it seems to overly complicate ISAs and cause confusion (ref. OP); with the potential to lose the ISA status if you forget to return the money to the flexible ISA before the end of the tax year.

jimjames

Qyburn said:

The "nifty trick" isn't aimed at reducing tax in the current year, it's intended to maximise interest earned outside the ISA, while still gaining this year's ISA allowance for future use.

It's only any use if your interest rate outside the ISA is higher even after accounting for tax.

The nifty trick was only of real relevance when interest rates were a pittance. Now you can earn a decent amount on cash savings it makes far more sense to use an ISA as you're then protected from being taxed which can happen on relatively small amounts at 5% compared to 1% interest.

Eco_Miser

Qyburn said:

The "nifty trick" isn't aimed at reducing tax in the current year, it's intended to maximise interest earned outside the ISA, while still gaining this year's ISA allowance for future use.

It's only any use if your interest rate outside the ISA is higher even after accounting for tax.

it's also of use if you are expecting to receive a large sum in the future (selling a business, inheriting, massive PCLS, ...) at which point that sum goes into the flexible ISA immediately, instead of drip-feeding at 20k a year.