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ISAs - Increasing your annual tax-free savings allowance
mball2008
Posts: 1 Newbie
I have a question relating to ISAs, which I thought members might be able to answer.
As I understand it, ISAs are a government initiative offering everyone an annual tax-free saving allowance to encourage saving. This is limited by the government to an allowance of £3,600 per year for Cash ISAs (which is what my question relates to) and another £3,600 per year for investment in shares.
However, it is the Banks and Building Societies' decision to determine the interest rate that they offer on their Cash ISAs, which vary across the marketplace. Obviously, all of them benefit from being attractive tax-free rates though.
My question, then, is what stops Banks and Building Societies from offering a side agreement which will give customers the benefit of being able to save a larger amount of money with the tax-free rate. Let me explain...
Would it be possible for an ISA provider to offer customers a second account in which to deposit their savings, once they had used up their annual £3,600 allowance? This account would earn 0% interest. However, depending upon the amount deposited in the second account, the ISA provider will vary the level of interest being earned in the ISA. In effect, with an adjustment being made to the interest rate of the ISA, could it be worked so that the customer was receiving the benefit of a higher, tax-free interest rate on a figure exceeding the £3,600 limit?
An example: A person has opened an ISA and deposited £3,600, instantly using up their annual allowance. They are receiving a rate of 4.5% (Gross AER), with, for this example, interest paid annually. At the end of the year, they will receive £162 of interest, giving them a total of £3,762. However, they have an additional £1,000. If they were to deposit this into a second account with 0% interest, the ISA provider could then increase the interest in the ISA to 5.75% (Gross). This would give the person interest of £207 on their £3,600, which would be the equivalent of them earning the tax-free rate of 4.5% (Gross) on £4,600.Once the new tax year arrived, the bank would automatically transfer the money in the second account to the ISA, and adjust the interest rate accordingly.
As I understand it, the ISA provider would not be losing out (unless they were unhappy to pay the level of interest they were offering on a larger sum of money), as they would not be paying any interest on the £1,000 in the second account. The only person losing out would be the tax man. Is this correct? Is there any legislation that would stop ISA providers from offering such a deal to customers?
I would be interested to hear members' thoughts on such an idea.
As I understand it, ISAs are a government initiative offering everyone an annual tax-free saving allowance to encourage saving. This is limited by the government to an allowance of £3,600 per year for Cash ISAs (which is what my question relates to) and another £3,600 per year for investment in shares.
However, it is the Banks and Building Societies' decision to determine the interest rate that they offer on their Cash ISAs, which vary across the marketplace. Obviously, all of them benefit from being attractive tax-free rates though.
My question, then, is what stops Banks and Building Societies from offering a side agreement which will give customers the benefit of being able to save a larger amount of money with the tax-free rate. Let me explain...
Would it be possible for an ISA provider to offer customers a second account in which to deposit their savings, once they had used up their annual £3,600 allowance? This account would earn 0% interest. However, depending upon the amount deposited in the second account, the ISA provider will vary the level of interest being earned in the ISA. In effect, with an adjustment being made to the interest rate of the ISA, could it be worked so that the customer was receiving the benefit of a higher, tax-free interest rate on a figure exceeding the £3,600 limit?
An example: A person has opened an ISA and deposited £3,600, instantly using up their annual allowance. They are receiving a rate of 4.5% (Gross AER), with, for this example, interest paid annually. At the end of the year, they will receive £162 of interest, giving them a total of £3,762. However, they have an additional £1,000. If they were to deposit this into a second account with 0% interest, the ISA provider could then increase the interest in the ISA to 5.75% (Gross). This would give the person interest of £207 on their £3,600, which would be the equivalent of them earning the tax-free rate of 4.5% (Gross) on £4,600.Once the new tax year arrived, the bank would automatically transfer the money in the second account to the ISA, and adjust the interest rate accordingly.
As I understand it, the ISA provider would not be losing out (unless they were unhappy to pay the level of interest they were offering on a larger sum of money), as they would not be paying any interest on the £1,000 in the second account. The only person losing out would be the tax man. Is this correct? Is there any legislation that would stop ISA providers from offering such a deal to customers?
I would be interested to hear members' thoughts on such an idea.
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Comments
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Some banks already do pretty much this. You can get 10% ISAs from Abbey and Alliance and Leicester as long as you also put money into one of their other products. Unfortunately the other products are for the most part dire, but the increased ISA rate is enough to sucker people into thinking they're getting a good deal.
In other words, there's nothing stopping them from doing it, it's just that they'd rather make money on other products
I am a Chartered Financial Planner
Anything I say on the forum is for discussion purposes only and should not be construed as personal financial advice. It is vitally important to do your own research before acting on information gathered from any users on this forum.0 -
I thought you weren't allowed to offer ISAs as an incentive for other products.
Maybe the rules were changed or there's some small print. Maybe it's OK if it's linked to a risky product.0 -
Alliance and Leicester linked their recent 10% ISA to their Premier Current Account. No risk there, just a pretty typical current account.I am a Chartered Financial Planner
Anything I say on the forum is for discussion purposes only and should not be construed as personal financial advice. It is vitally important to do your own research before acting on information gathered from any users on this forum.0 -
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Actually you don't/didn't for new money. I've got the 10% ISA with just the current account required, no stock market investment at all. If I'd had to get a stock market investment through them, you can guarantee I'd have a different ISA right now!Yes, but you have to "Link" it to poor stock market investments!, otherwise wed all be investing for 10% tax free!! I am a Chartered Financial Planner
Anything I say on the forum is for discussion purposes only and should not be construed as personal financial advice. It is vitally important to do your own research before acting on information gathered from any users on this forum.0 -
The website still quotes "Linked" what does this mean?
So youve invested £3,600 at 10% with no additional linking?
"New customers only"-just the way to pee off existing cutomers who cant get this!0 -
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I signed up for the Premier Current account, and am now funding it as required. I applied for the Premier ISA at the same time, and can now transfer money into this 10% beauty whenever it becomes available. I'm hoping to get to the full £3600 by about September.The website still quotes "Linked" what does this mean?
So youve invested £3,600 at 10% with no additional linking?
"New customers only"-just the way to pee off existing cutomers who cant get this!I am a Chartered Financial Planner
Anything I say on the forum is for discussion purposes only and should not be construed as personal financial advice. It is vitally important to do your own research before acting on information gathered from any users on this forum.0 -
I think you are getting confused with teh Abbey Super ISA which makes you put your funds half and half in a fund-based ISA as well as their high rate cash ISA.
Anyway, if you are forfeiting the interest on your current account or otherwise, why not put your money in an instant saver (normally online) account that is linked to your other account to allow for instant and infinite transfers (if with the same bank) whilst earning 6% pre-tax.
Obviously this question you are asking all depends on how much tax you are paying and how much better you could be earning the money tax free, but even a whole percentage point on a £3600 subscription to an ISA isn't that much (£36), in comparison to an account paying the rate of inflation after tax (~3%) on say £10000 (£300) that you could be forefeiting.Student Moneysaving Expert :beer:0 -
So now your saying "When it becomes available" could you please show me a link which explains that by opening an A & L current account, i can then invest in an 10% tax free ISA? Thanks0
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