Cash ISAs? Do me a favour, only for high rate tax payers

Han_naH

Can I just end this cash ISA addiction right here once and for all...

By putting £3000 in a top-paying cash ISA rather than a top paying standard savings account, your gain amounts to:

£116 / year for a higher rate tax payer

£30 / year for basic rate tax payers.

(This is based on 6.55% with West Brom Star account, and 6.25% best cash ISA.)

So why on earth does the savings page on MSE put the cash ISA line in big lights at the top of the page, when what really matters is the best standard savings accounts, and that stocks and shares ISAs are the way forward for most people.

We are talking about 3K here. Just 20 or 40% of 6% on 3K.

I didn't even bother opening a cash ISA for this, and I reckon too many people are spending lots of time sifting through this cash ISA nonsense.

Come on Martin et al, lets put it straight to people: if you are a basic rate tax payer, forget about cash ISAs. It just isn't worth the effort.

Am I missing something?

mrkbrrws

Cash ISA balances can be well in excess of £30,000 by now and many people do not wish to use the Maxi ISA allowance, so why not use the Mini Cash ISA allowance?

roswell

Your possibly missing out that after 30 yeras of isa contributions the differnce isnt that little .. more to the point people cah change tax brackets so starting in lower bracket then finding your in the higher bracket in 3 years can have its advantages.

Fella

roswell wrote: »

Your possibly missing out that after 30 yeras of isa contributions the differnce isnt that little .. more to the point people cah change tax brackets so starting in lower bracket then finding your in the higher bracket in 3 years can have its advantages.

Exactly correct.

ManAtHome

Bits you're missing:
1. time moves on, £3k a year moves on (as mrkbrrws said, could now be well over a grand a year extra).
2. have some ambition and aim for paying higher-rate tax sometime
3. may be more effective leaving stocks and shares to a pension fund rather than post-tax income
4. what's the big deal on ISAing £7k in shares, you get over £9k CGT exemption (unless you also accept point 1)...

The_Economist

leejp wrote: »

Am I missing something?[/quote

Yeh, it's probably the only thing in life thats not taxed at the moment. :rolleyes:

Aegis

If you were to invest the maximum amount in each account for 10 years, you would receive about £2700 more interest in the ISA than you would in the savings account. Somewhere in the region of 5.4% more interest in the long run than the normal savings account. If you were a higher rate taxpayer you'd be looking at £6000 difference. If at some point you switch from basic to higher rate, you'll gain somewhere between the two amounts.

Also, you can often find ISA accounts that pay as much as or more than normal savings accounts. My ISA currently pays more than most instant access savings accounts, which puts me in a very favourable position in terms of untaxed interest.

meester

leejp wrote: »

Can I just end this cash ISA addiction right here once and for all...

I do hope not, you will be doing the world a great disservice.

By putting £3000 in a top-paying cash ISA rather than a top paying standard savings account, your gain amounts to:

£116 / year for a higher rate tax payer

£30 / year for basic rate tax payers.

So you save £30/year at a minimum, and your money is tax sheltered for life, even as a higher rate tax payer in the future.

Something that pays £30 EVERY YEAR, and rising with inflation is worth hundreds of pounds (think of it as a BTL, that doesn't have any costs, maintenance, tenants from hell, etc.)

So not opening a cash ISA costs you £600, as a basic-rate taxpayer. Wow. Fail to invest by April 5th, and that opportunity is gone forever.

Oops.

(This is based on 6.55% with West Brom Star account, and 6.25% best cash ISA.)

So why on earth does the savings page on MSE put the cash ISA line in big lights at the top of the page, when what really matters is the best standard savings accounts, and that stocks and shares ISAs are the way forward for most people.

Utter nonsense. Firstly 'most people' do not have money to invest in the stockmarket, whereas 'most people' do have cash to save.

Secondly, 'most people', being basic-rate tax payers have

(a) ZERO liability on income from shares, given as there is a basic-rate tax credit
(b) a £10k(almost)/year, plus the same again for their spouse, capital gains tax allowance that is going unused.
(c) investments that 'most people' are invested in do not have significant yield (income). Pretty much zero on most emerging markets funds, and even funds designed for equity income are only yielding 3% (and don't forget this carries no tax liablity for basic-rate tax-payers).

We are talking about 3K here. Just 20 or 40% of 6% on 3K.

I didn't even bother opening a cash ISA for this, and I reckon too many people are spending lots of time sifting through this cash ISA nonsense.

Come on Martin et al, lets put it straight to people: if you are a basic rate tax payer, forget about cash ISAs. It just isn't worth the effort.

Am I missing something?

Yes.

Nearly everybody should use their cash ISA allowance in full. There is always the opportunity to transfer it into a share ISA in the future if you are paying more tax on the income from the shares (i.e. you are a higher-rate tax payer) than you are saving on the interest in the ISA, or you are going over the £10k annual capital gains limit and paying CGT (which is now only 18%).

There is a reason why the government now allows people to transfer large amounts cash to share ISAs, and that is that it costs the government far less than the cash exemption. Ironically, it makes investing in a cash ISA even MORE attractive (i.e. assuming you have the full £7.2k to invest (as of April 6), putting £3.6k into cash and £3.6k into shares), since even if the share ISA has not much value at the moment as a tax shelter (because your annual capital gains are too low), if you anticipate in the future that you will be making high annual capital gains, you know that you will be able to transfer from cash to shares, and in the meantime you can DEFINITELY save tax TODAY on your interest.

Btw, you got your sums wrong.

6.25% of £3,000 is £187.50/year, for both basic- and higher-rate tax payers

6.55% of £3000 is £196.50/year. The basic rate tax liability is £39.30. The higher rate tax liability is £78.60. So net is either £157.20 for basic-rate, or £117.90 for higher rate tax payers.

So the saving is either £30.30/year, as you said, for basic-rate tax payers, or £69.60/year for higher-rate.

For a higher-rate tax-payer to earn £69.60, he would have to earn £116 before tax. So clearly the total value of cash ISA is potentially several thousand pounds.

Savings_Dave

I don't think that Cash ISAs are nonsense. They where released to give people an incentive to save and their tax free status is certainly attractive, regardless of how small the difference you think it is. I'm on a below average income (BR tax payer) so a Cash ISA is a good way for me to actually save! Again higher rate taxpayers also benefit regardless.

I know a Maxi ISA may give a higher rate of return - but it also has a higher risk attached. I'm not one for taking risks so I have avoided a stock and shares (Maxi ISA) and have for the last few years been making the most of my Cash ISA allowance (although I wish I had started sooner). Of course anything outside of £3000 a year is invested in other tax free products, regular savers, fixed rate bonds and high interest savings account. I think you need a good mix and Cash ISAs are a good start as long as you treat them as untouchable savings and maximise the gains

Is the West Brom Star account tax free? Of course not, its probably 5.2% net with annual interest and your obviously worse off interest wise...for me this would be another place for cash savings (although only after I've made the most of other investments). Yes its variable interest (like my ISA) and has no restrictions - but you still have to pay tax.

Shouldn't this be in the ISA forum? ISA rules are changing again come April - mainly for the better.

Mikeyorks

leejp wrote: »

Am I missing something?

Yes ....... and you couldn't even post it in the correct forum!

PasturesNew

I've never had the luxury of having spare cash to save. Any "savings" were always short-term until the next disaster, so we are talking hand-to-mouth here forever.

But I think there's a lot of assumptions made about ISAs. My circumstances have recently changed and I can now afford savings. So I will now be getting a cash ISA each year (that whole share ISA I've still no understanding about) ... I didn't realise that you could buy an ISA each year and therefore the cumulative effect of the interest free on it. Although I still don't know, perhaps this can be answered: If in Year 1 I put in £3k, then in Year 2 the interest is added (let's say £180). Does that mean that the next year the whole £3180 is tax free interest again? or is the tax free bit just on the initial £3k?

As has been pointed out above, it's the cumulative effect of being able to save £3k every year that, over time, makes these interesting... IF you're wealthy enough to have that much each year to save in the first instance.