ISA v savings account - Have I understood this

tatartan

Hi all,

I *think* I have this right but wanted to check.

I am a higher rate taxpayer
If all my savings were in a top rate savings account I'd breach my £500 PSA
I therefore have all my savings in one cash ISA at a slightly worse rate than best savings accounts

I think this is the wrong strategy.... I think I should have a savings account (and maximise the £500 personal allowance) AND a cash ISA for the rest.

I have read the personal allowance guide and it is very good....but this question remains open in my mind...can someone please clarify? Thanks in advance!

masonic

Yes, if you can find a normal savings account paying more than the best cash ISA, putting enough in there to earn £500 interest would be a better option for you. A cash ISA would likely be the next best place for savings, followed by premium bonds - though the order of those two is somewhat dependent on interest and prize rates.

Mark_d

I agree with masonic however I think there are other options that might be worth considering.  You might want some cash in fixed rate savings, inside or outside an ISA.  Overpaying on a mortgage would also be equivalent to a savings account and would effectively be free from tax.

In my opinion the tax benefits of an ISA have more potential when used as a stocks & shares ISA, or a stocks & shares Lifetime ISA, rather than a cash ISA.  What you do depends on your goals, your attitude to risk etc.  I can't advise.  However I can say that I use my ISA allowance for stocks & shares.  And my cash savings goes in to instant access and fixed term savings accounts but mostly premium bonds.

tatartan

Thanks both. I am in the fortunate position that my mortgage is well below the interest rate paying in both savings accounts and ISA - even poor ones. Therefore will put a lump sum towards it when due to re-mortgage in 2027 and throw money into savings pots until then.

I have thought about moving beyond the standard ways to save...never taken the plunge beyond cash ISA as there was always something upcoming whether it be deposit, wedding etc. All those are done now so perhaps worth exploring. I'll have a think. 

My immediate aim is get myself and my (tragically financially lazy wife) into better rates for the new year. 

amanda1024

As a higher rate taxpayer myself, this is my strategy - but obviously the best strategy for you might be different, depending on eg whether you’re saving regular amounts monthly or a one-off sum, and how long you’re saving for:
- several regular savings accounts (at >6% interest) - I put c. £1,000 per month into these, and each year get about £400 interest
- an easy access savings account (at c. 5% interest) - the balance in this fluctuates around £2k over the course of each month, so about £100 interest a year
- fixed rate cash ISAs (which I put £16k into each year, mostly from when the regular savers mature) - rates are currently pretty good (>5%, so above inflation), and I potentially want to use the cash to pay off my mortgage at the end of a fixed rate deal in a few years, so I’m wary about going the stocks and shares route for the majority of my savings
- however, recently I’ve also been using the £4k LISA allowance as a back-up (alongside my pension) - the government bonus means I’m slightly less worried about losing capital, and since the money’s there for the long term (until I’m 60), and interest rates on cash LISAs are much lower, I feel like there’s a better case (risk vs reward) for stocks and shares

I don’t currently have any premium bonds - as far as I can see the ‘average’ prize rate (4.65%?) is quite a bit lower than my savings interest rates and I’m not much of a gambler…

Albermarle

tatartan said:

Hi all,

I *think* I have this right but wanted to check.

I am a higher rate taxpayer
If all my savings were in a top rate savings account I'd breach my £500 PSA
I therefore have all my savings in one cash ISA at a slightly worse rate than best savings accounts

I think this is the wrong strategy.... I think I should have a savings account (and maximise the £500 personal allowance) AND a cash ISA for the rest.

I have read the personal allowance guide and it is very good....but this question remains open in my mind...can someone please clarify? Thanks in advance!

For a higher rate taxpayer, paying more into a pension is often a good idea.
The downside is that you can not withdraw it until your late Fifties, but higher rate tax relief on contributions is very generous and having a decent pension pot will be very useful when you are older.

Qyburn

tatartan said:

My immediate aim is get myself and my (tragically financially lazy wife) into better rates for the new year. 

A joint account works well for that side of things. Once the account's set up she doesnt have to do anything. For tax purposes the interest is treated as 50/50 so the account could earn a total of £1,000 before you'd pay tax. If she's not a higher rate taxpayer she'll need something else in her sole name to get all of her allowances.

Reed_Richards

I think that as a higher rate tax payer the right strategy is to maximise the amount of new money you put into an ISA each year, which can be up to £20k.  That money will be protected from tax for as long as you keep it in an ISA.  In time that may well be worth more to you than the small difference in interest that you might find between the best ISA and non-ISA account.  

NorthernGeezer_2

Mark_D.........."Overpaying on a mortgage would also be equivalent to a savings account and would effectively be free from tax"
I read this sentence with interest.
My son is inline for a bonus payment in this tax year that will take him into the higher rate tax band.
His thinking at the moment is that he puts the amount that takes him over the threshold in to his company pension, tax free.
I'm curious as to overpaying on your mortgage with money that has already been taxed can be seen as "free from tax"

masonic

NorthernGeezer_2 said:

Mark_D.........."Overpaying on a mortgage would also be equivalent to a savings account and would effectively be free from tax"
I read this sentence with interest.
My son is inline for a bonus payment in this tax year that will take him into the higher rate tax band.
His thinking at the moment is that he puts the amount that takes him over the threshold in to his company pension, tax free.
I'm curious as to overpaying on your mortgage with money that has already been taxed can be seen as "free from tax"

You need to consider these aspects separately. 

First there is income tax on the earnings, which can be avoided as you say by putting the money into the pension, because pensions are not only tax free investment vehicles, contributions also earn tax relief. 

Second there is tax on interest generated from a sum of money that is saved, which can be avoided by paying down a debt instead of saving the sum of money. Savings interest is taxable, whereas a reduction in borrowing interest is not. One can therefore avoid income tax from savings interest by instead using the money to pay down or offset debt. The net position is therefore equivalent to a tax free savings account at the same rate. But you can't put it in a pension AND use it to pay down a mortgage, so your son would be better off doing the former due to the tax relief.

isayhello

masonic said:

You need to consider these aspects separately. 

First there is income tax on the earnings, which can be avoided as you say by putting the money into the pension, because pensions are not only tax free investment vehicles, contributions also earn tax relief. 

Second there is tax on interest generated from a sum of money that is saved, which can be avoided by paying down a debt instead of saving the sum of money. Savings interest is taxable, whereas a reduction in borrowing interest is not. One can therefore avoid income tax from savings interest by instead using the money to pay down or offset debt. The net position is therefore equivalent to a tax free savings account at the same rate. But you can't put it in a pension AND use it to pay down a mortgage, so your son would be better off doing the former due to the tax relief.

Just curious, if you overpay your mortgage how do you ensure that your savings aren't taxed, as I understand this is automatically done by hmrc when they change your tax code, so they will do this anyway without knowing what you're using the savings for?