Can somebody explain this to me about ISAs

BallandChain

I've been looking at ISAs and know that the total you can pay in for this tax year is £3,000. If the interest on that is say 5% then that is only £150 a year interest. What is the advantage of opening an ISA if I can have a top savings a/c paying 6% or higher on the same amount? Any help gladly appreciated. :think:

wombat42_2

BallandChain wrote: »

I've been looking at ISAs and know that the total you can pay in for this tax year is £3,000. If the interest on that is say 5% then that is only £150 a year interest. What is the advantage of opening an ISA if I can have a top savings a/c paying 6% or higher on the same amount? Any help gladly appreciated. :think:

For any individual savings provider, the interest rates for an ISA and savings account is usually about the same. The ony difference is that for the saving account you get 20% tax knocked off the interest.

nicko33

The advantage is that you do not pay any tax on the £150.

You would probably have to pay tax on the £180 you got from the 6% account.
At 20% tax the £180 becomes £144
At 40% tax the £180 becomes £108 (huge advantage)

nicko33

wombat42 wrote: »

The ony difference is that for the saving account you get 20% tax knocked off the interest.

at least 1 other difference has been pointed out by dunstonh previously.
Income from ISAs does not reduce your age-related tax-free allowance for income

BallandChain

Thanks for your replies, I can see if I was paying at the higher tax bracket it would be more of an advantage to have the ISA. A difference of £6 isn't really an issue and saves me opening an extra account (ISA) I wouldn't need if you can see what I mean.

merlinthehappypig

You don't have to declare interest from ISA's in the income declaration for Child Tax Credit either, unlike interest earned elsewhere.

nicko33

£6 might not be much now, but the tax-free allowance of each ISA year is use it or lose it forever. You might not pay higher rate now, but maybe in the future - who knows?

And you might be losing more than £6

The MSE top cash-ISA is 6.25% tax free
The MSE top instant access 6.5%
The ISA is £31.50 better on £3000.

Next year if can find another £3600 the difference will be more than £100.
is that enough to make you open an ISA?

Aegis

BallandChain wrote: »

I've been looking at ISAs and know that the total you can pay in for this tax year is £3,000. If the interest on that is say 5% then that is only £150 a year interest. What is the advantage of opening an ISA if I can have a top savings a/c paying 6% or higher on the same amount? Any help gladly appreciated. :think:

The issue here is that you're comparing completely different interest rates. If you were comparing a savings account with 6.5% interest to another savings account with 5% interest, you'd conclude that the 6.5% one was a better product (and you'd be right). In much the same way, ISAs come with different interest rates, and to make this fair you should compare accounts with similar rates.

If you had a 6% ISA and a 6% normal savings account, the ISA would pay 6% net and the ordinary account would pay 4.8% net. Suddenly the difference becomes all to clear on the interest rate side of things.

Jonbvn

BallandChain wrote: »

Thanks for your replies, I can see if I was paying at the higher tax bracket it would be more of an advantage to have the ISA. A difference of £6 isn't really an issue and saves me opening an extra account (ISA) I wouldn't need if you can see what I mean.

On £150 interest, you would have to pay £30 tax outside of an ISA. Accumulate several years of ISA's and the tax-free interest becomes very significant.

Another great thing about ISA's is that you don't have to declare them to get tax-credits, and certain other benefits.