A question about savings (ISA and other)

Catplan

https://forums.moneysavingexpert.com/discussion/comment/81939708#Comment_81939708

Each to their own, pension is a great way, I tend to use this before isa, for example 10k into your pension becomes 12.5k straight away you can also claim back higher rate tax as well. It does usually mean the money is locked away longer until you can access it.

I’d rather pay tax on interest than earn nothing even with tax code adjustments…. I’ve just clawed back a five figure sum, which went straight into my pension getting another 25% straight away.

Yorkie1

https://forums.moneysavingexpert.com/discussion/comment/81939708#Comment_81939708

If you are sure that you don't want to put any of the money into a pension (workplace or SIPP), then it is better to go for the highest interest and recognise that you will pay tax on it. As you recognise, it is better to have more than £500 interest and pay tax on the surplus, than it is to have less than £500 interest on a lower interest rate.

The tax code adjustments aren't that much of an issue. Just keep decent records so you can check later on.

If you are quite close to a tax boundary e.g. basic / higher rate, then making Gift Aid or pension contributions to bring yourself back into basic rate tax might be worth doing the calcuations (i.e. getting the £1K tax free savings interest back).

esselle_aitch

Thanks @Catplan and @Yorkie1, I keep forgetting that I could make extra payments into my pension. Trouble is I’m still trying to get on to the property ladder so probably not a good idea to tie my money into something I can’t easily access for a while. But definitely something to consider in the future if I’m still lucky enough to be in this position (although know it’s better to pay into pension earlier rather than later for compounding). I’m not very financially-savvy so don’t really understand tax codes etc and just tend to trust that my company and HMRC are right. I really hate getting those letters telling me that I’ve underpaid though as it makes me feel like I’ve done something wrong (ie deliberately trying to avoid paying tax when that’s not true). However I can understand what everyone’s saying that it’s better to be getting interest rather than the money just sitting in a current account. Thanks for your input and advice!

Yorkie1

If you're saving for a property then yes, pension contributions won't be the best choice if you will need the funds for a deposit etc.

The tax code adjustments eventually catch up with themselves but it does take time work itself through. With increasing interest rates over recent years, people have earnt more taxable interest in later years than HMRC estimated, based on earlier years.