What to do with savings - tax on interest question.

Lia73

Hi...I've been trying to open an NS & I account, without much success due to debit card issues, but my actual question is more about where to put my savings. They are sitting in a current account not doing much.  I wanted to go for the fixed rate saver NS&I are offering and would be putting around £65k in.  I am a basic rate tax payer so will pay 20% tax on interest earned if I have read things correctly?  I also have an ISA earning nothing as I had to reactivate it, which I have now done.  The rate is 1.75 %.  My question is - can I put £20k into an ISA and get tax free interest on that and also put the other £45k into a high interest fixed term account?  Would that make the best sense / generate the most interest for me?  I rent, so no mortgage etc to put money into - I am just now trying to generate the most income on my savings as it is something I never thought about before.  I am just getting a little confused along the way, despite MSEs great guides and information.

where_are_we

Assuming you have not contributed to a cash ISA this tax year, you could open a Shawbrook Fixed rate Cash ISA Bond 81 paying 5.83% Fixed and deposit £20K, assuming you have also not contributed to any other sort of ISA this tax year. As part of opening this account also request a Cash ISA transfer of your old Cash ISA to your new Cash ISA. At the same time continue with your NS&I opening of what I assume is their I Year Guaranteed Growth Bond Issue 72 @6.2%. You can put in your remaining £45K but remember your £65K is locked away for a year. Do you have easy access to about 6 months of your spending as a safeguard to unforeseen expenditure? Are you under 40 and would like to own your own property? Opening a LISA and depositing £4K might be something to consider. If you do that, remember you would only be able to put in £16K into the Cash ISA because of the overall total ISA limit of £20K each tax year. 

Newbie_John

You pay tax on interests over £1000 in a tax year.
If you put £45k to this 6.2% fixed account - you'll earn £2790. Taxable is £1790 at 20% rate (unless you earn £48k+ a year), so £358 tax to pay.

You could spread it little bit - £25k to the 6.2% (tax will be paid in 2024-2025 tax year), put £20k to an easy access or fixed for 6 months - they're 5%+ and you'll pay tax this year 2023-2024. Then when after April put that £20k into new ISA. This way tax will be lower - £110 next year and potentially no tax this year (if your total interest are under £1k of course).

Albermarle

If you earn more than £17,750 and less than £50K you can earn £1000 in interest without paying tax .
Any money in a cash ISA is tax free, but as you know you are limited in how much you can add each year.
If there is tax to pay then HMRC will deal with it automatically, usually by reducing your tax code for subsequent years so you pay a bit more income tax.

They are sitting in a current account not doing much.
Even when interest rates were low, this was not a good idea. Now interest rates are >5% it is a very bad idea as you have realised. A few more hints;
1) When looking around for a savings provider, do not just stick to well known names. Any provider mentioned in the MSE list or on this site are all registered UK banks and are covered by the FCSC compensation ( up to £85K) if anything went wrong.
Compare The Best UK Savings Accounts (moneyfactscompare.co.uk)
2) If any of the cash is unlikely to be needed long term then it would be better to invest some of it, maybe by adding to a pension.
3) Read this forum and the ISA subforum regularly and you should pick up some good info/.
ISAs & tax-free savings — MoneySavingExpert Forum