Moving money from standard savings account to an ISA

Myr

We have had a joint instant access savings account now for a couple of years and because of more favourable interest rates than when we started, this tax year we may be required to pay tax on the interest.
If we open individual ISA’s now and transfer the maximum amount each out of the savings account, will that lessen the tax payable on the accrued interest earned up to now on the whole amount or will it make no difference for this current tax year?

molerat

Interest that has already accrued and added to the account is taxable this year, moving the capital, and that already paid interest, into a tax free environment won't change that.

slinger2

It'll make little or no difference for the current tax year. However it may still be a good idea to open some ISA, since it might have an impact on future tax years.

Myr

Thank you both. That is what I thought. And yes, we will take advantage to move some now before the end of this tax year so that we can take advantage of next years allowance to move some more.

Scot_39

It will only save on the remaining c3 weeks of the tax year - between whenever the money leaves the account and the end of tax year on the 5th.

It will as you suspect have no bearing on the taxable interest already earned - or actual tax liability - about your joint share of interest each - if split equally - the default HMRC rule iirc - and your respective 2x£1000 personal savings allowances - assuming lower tax band(*).

https://www.gov.uk/apply-tax-free-interest-on-savings

Unless that is either of you qualify for the zero starter rate nil tax band - another upto £5000 pa - for those earning less than the IT PA + starter rate - who can get £12570 + £5000 starter rate band + the £1000 nil rate savings personal allowance - £18570 total.  (Each pound over £12570 in earnings reduces the £5000 starting band by £1)

You really need to invest in the ISA early in the tax year - to get the full tax free advantage - if going to go over the savings personal allowances. But you are also correct - it's only been important for those with relatively large savings for the near decade of emergency rates. The upto £1000 per person for lower tax band - savings allowance (£500 for higher rate 40% tax band, £0 for upper band) has previously shielded many - so could take advantage of the generally higher rates in non ISA accounts.

 

But remember with the ISA allowance - there is a simple "use it or lose it" rule - for each tax year.

So each person could put £20,000 before Apr 5th for this tax year - and another upto £20,000 annual limit (currently - subject to media speculation for weeks ) come Apr 6th for the next tax year.

I'd think about doing it now regardless - edit - thinking about next tax year now (before let it drift well into next) and you then have that £20000 additional headroom - if you want or need it next year.