Spending your ISA interest

Isarulesaretoocomplex

sherbie28 said:

poseidon1 said:

sherbie28 said:

I definitely will leave it there but in the event of wanting to use some of it I was wondering how it works. 

Just so you are aware, there are a number of retirees ( I being one) who receive ISA interest on a monthly basis to spend on day to outgoings precisely because it is entirely tax free non reportable income. 

 Flexible ISAs allows us to go a stage further and return the interest we spent in the year so that at the start of the next ISA year we have an increased amount to generate a new lot of tax free income, in addition to availing ourselves of a new £20k ISA allowance to 'rinse and repeat' going forward.  A somewhat satisfyingly tax free virtuous circle. 

Of course this is all predicated on have lumps of cash  or near cash elsewhere, sitting ready and waiting to feed the ISA machine.

I did wonder if this was a 'thing' that you could do but wasn't sure. It's all new to me and my parents.
 I'm trying to help them navigate an unexpected inheritance, their only income is their state pensions. Is there a good time of year to open an ISA, are rates better at a certain time? If the government does as you mentioned lower it to £4000 then I need to help them choose sooner rather than later. 

Depending on your parents financial status and I understand you mention their only source of income is their state pension they will both have on top of their personal isa allowance the personal savers allowance and quite possibly the starting saving allowance theoretically both having 18750 currently without the need to pay tax. Look up the starting rate in Mse. Regarding easy access isas those which are flexible allow you to add and also take money from within the same tax year of the initial investment. Just be careful with the rates on these as some have a certain time with bonus and can drop the rate. Example is I opened a 212 trading at 5.17 and within 2 months it sits currently at 4.5. 

xylophone

a good time of year to open an ISA, are rates better at a certain time?

No - at one time there was a  tendency for institutions to offer a favourable rate at the beginning of the tax year but now it's a case of keeping an eye on rates and choosing what best suits the saver's requirements/circumstances.

https://www.thisismoney.co.uk/money/saving/article-1583864/Best-savings-rates-Isas-Cash-I

poseidon1

sherbie28 said:

poseidon1 said:

sherbie28 said:

I definitely will leave it there but in the event of wanting to use some of it I was wondering how it works. 

Just so you are aware, there are a number of retirees ( I being one) who receive ISA interest on a monthly basis to spend on day to outgoings precisely because it is entirely tax free non reportable income. 

 Flexible ISAs allows us to go a stage further and return the interest we spent in the year so that at the start of the next ISA year we have an increased amount to generate a new lot of tax free income, in addition to availing ourselves of a new £20k ISA allowance to 'rinse and repeat' going forward.  A somewhat satisfyingly tax free virtuous circle. 

Of course this is all predicated on have lumps of cash  or near cash elsewhere, sitting ready and waiting to feed the ISA machine.

I did wonder if this was a 'thing' that you could do but wasn't sure. It's all new to me and my parents.
 I'm trying to help them navigate an unexpected inheritance, their only income is their state pensions. Is there a good time of year to open an ISA, are rates better at a certain time? If the government does as you mentioned lower it to £4000 then I need to help them choose sooner rather than later. 

You have not mentioned the size of the inheritance, but now you have gained better insight into the 'magic' of ISA tax free income I would suggest you make a concerted effort ( today), to utilise both parents £20,000 allowance for 2024/25 to take £40,000 of their inheritance out of the income tax net if nothing has been done in this regard as yet. The allowance is a use it or lose it facility.

Obviously, if matters have been left this late, then you would have to use an online ISA provider able to accept debit card subscriptions before midnight tonight, so depends how motivated you are to substantially improve your parents tax free income position.

If you manage to use their allowance today, then from tomorrow onwards there is a whole new £40k allowance opening up for 2025/26. 

In theory, and by the middle of next week your parents could have £80k generating as an example £281 per month tax free on a 1 year fixed rate ISA at 4.22% (Paragon Bank).

The more income  you can generate for them tax free, the less hassle for you in navigating the tax system on their behalf with regard to taxable interest.

I  routinely submit self assessment tax returns since 2011 so not a big deal for me, but I suspect you may find it an unwanted imposition on your time, depending on the quantum of interest you hope to generate on your parents' behalf going forward.

sherbie28

It's just over 500K. They have savings accounts with the majority being in NS&i which i know is a terrible rate at the moment. I've tried to level it out over the other accounts with better rates so they're still protected by FSCS. They want to buy a house (they rent at mo), so it needs to be easily accessible if one comes up. I managed to get an ISA open in Dad's name. They are not keen on institutions they haven't heard of. I don't think they will need to do self assessment at the moment as the interest has just come in and it's under 17K. I'm not sure how much they will be taxed on as no idea of their tax codes. Unless I have this wrong the state pension and savings interest earned is over £18750 so they lose the lose the starting savers allowance. If Dad's just opened a fixed rate ISA on Thursday he can open a different one tomorrow with £20k, mum can also open her one with £20K? It's ok to have three/four ISAs from different years as long as you don't put in more than 20 in one year?

Dazed_and_C0nfused

sherbie28 said:

It's just over 500K. They have savings accounts with the majority being in NS&i which i know is a terrible rate at the moment. I've tried to level it out over the other accounts with better rates so they're still protected by FSCS. They want to buy a house (they rent at mo), so it needs to be easily accessible if one comes up. I managed to get an ISA open in Dad's name. They are not keen on institutions they haven't heard of. I don't think they will need to do self assessment at the moment as the interest has just come in and it's under 17K. I'm not sure how much they will be taxed on as no idea of their tax codes. Unless I have this wrong the state pension and savings interest earned is over £18750 so they lose the lose the starting savers allowance. If Dad's just opened a fixed rate ISA on Thursday he can open a different one tomorrow with £20k, mum can also open her one with £20K? It's ok to have three/four ISAs from different years as long as you don't put in more than 20 in one year?

No, you ignore savings interest and dividend income when calculating any savings starter rate band.

For example if taxable non savings non dividend income (such as pensions, earnings, rental income profits) is say £15,000 then the savings starter rate band would be reduced from £5,000 to £2,570 (or £1,310 if he has applied for Marriage Allowance).

slinger2

You can have as many ISAs as you wish. You can have more than one in a particular year. An ISA can also contain money from more than one year. So  if your dad "opened a fixed rate ISA on Thursday" it might well be that he can add another £20k to the same ISA tomorrow (new tax year). Check out the T&Cs, but many fixed rate ISA let you make additional deposits within a shortish window of opening.

xylophone

With regard to tax, your parents are treated as individuals.

If money is in joint accounts, then each of them will be treated as being entitled to half the interest.

Your father has just funded an ISA for the current tax year.

Presumably you are saying that it is not possible to open and fund an ISA for your mother today.

From Sunday he can fund another ISA (s) up to £20,000 in total. He might do this by contributing the full amount to the ISA just

opened (T & C permitting) or he might open another/others.

Your mother can open an ISA (s) and fully fund.

The interest from the ISAs is tax free.

You say that your parents' only income (apart from savings interest) is from their state pensions.

Let's suppose that Mrs Smith had a full New State Pension and no other income apart from  savings income (interest) from non

isa accounts in which she was holding a substantial inheritance.

In the year just ending, her total pension income was £11,502.

She also received  interest of £7,000 from her savings accounts. She would  not be liable for tax because she would have the remainder of her Personal Allowance, the full starter rate for savings and the basic rate personal savings allowance  to set against her income.

Now suppose that Mrs Smith has a state pension of £14,000 a year and receives £7000 in savings interest.

Her Personal Allowance is more than fully utilised by her pension, but she can set the interest against the reduced starter rate for

savings (£3570) and the basic rate Personal Savings Allowance (£1000).  She is liable for tax (at 20%) on £2430 of the interest received.

The savings institutions will have advised HMRC of the interest paid to Mrs Smith and she will receive a tax demand from HMRC in due course.

It should be noted that regardless of the amount of her other income, should Mrs Smith receive interest of over £10,000, she would need to register for self assessment.


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


It should be noted that regardless of the amount of her other income, should Mrs Smith receive interest of over £10,000, she would need to register for self assessment.


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

https://www.gov.uk/individual-savings-accounts/how-isas-work

poseidon1

xylophone said:

With regard to tax, your parents are treated as individuals.

If money is in joint accounts, then each of them will be treated as being entitled to half the interest.

Your father has just funded an ISA for the current tax year.

Presumably you are saying that it is not possible to open and fund an ISA for your mother today.

From Sunday he can fund another ISA (s) up to £20,000 in total. He might do this by contributing the full amount to the ISA just

opened (T & C permitting) or he might open another/others.

Your mother can open an ISA (s) and fully fund.

The interest from the ISAs is tax free.

You say that your parents' only income (apart from savings interest) is from their state pensions.

Let's suppose that Mrs Smith had a full New State Pension and no other income apart from  savings income (interest) from non

isa accounts in which she was holding a substantial inheritance.

In the year just ending, her total pension income was £11,502.

She also received  interest of £7,000 from her savings accounts. She would  not be liable for tax because she would have the remainder of her Personal Allowance, the full starter rate for savings and the basic rate personal savings allowance  to set against her income.

Now suppose that Mrs Smith has a state pension of £14,000 a year and receives £7000 in savings interest.

Her Personal Allowance is more than fully utilised by her pension, but she can set the interest against the reduced starter rate for

savings (£3570) and the basic rate Personal Savings Allowance (£1000).  She is liable for tax (at 20%) on £2430 of the interest received.

The savings institutions will have advised HMRC of the interest paid to Mrs Smith and she will receive a tax demand from HMRC in due course.

It should be noted that regardless of the amount of her other income, should Mrs Smith receive interest of over £10,000, she would need to register for self assessment.


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


It should be noted that regardless of the amount of her other income, should Mrs Smith receive interest of over £10,000, she would need to register for self assessment.


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

https://www.gov.uk/individual-savings-accounts/how-isas-work

Xylophone has summed up why from your perspective , limiting the quantum of taxable interest receivable ( in favour of tax free income ) is to your benefit as well as your parents.

 I have no doubt that you will be lumbered with the task of  handling self assessment reporting on their behalf if/when either of them trigger the thresholds where this becomes an issue. I am sure you would prefer to avoid this if ISAs can be utilised to optimum effect.

sherbie28

Definitely want to try and avoid having to do self assessment. If the savings interest has just been paid for 24/25 when are they likely to hear from HMRC?

friolento

sherbie28 said:

Definitely want to try and avoid having to do self assessment. If the savings interest has just been paid for 24/25 when are they likely to hear from HMRC?

It's not massively complicated to do a self assessment if the only income is from pensions and savings.