ISAs vs savings accounts - tax on interest

[Time Waster]

A quick question to clarify. You only pay tax on interest earned above £1000 if basic rate tax payer or £500 if higher tax rate payer, right? That's a year I assume so if you are on basic rate that's £25000 in savings a year. So, being very stupid here I know, once you're savings have reached this £25,000 then at 4% interest you're going to start paying interest.

So if ISA and the best savings accounts have similar interest rates then savings accounts are as good as ISAs up to this 25k theoretical tax threshold. After this you're best saving in an ISA. If you can only save £150 per month at 4% interest then that's about 11 years before an ISA is needed. Right?

I'm thinking a savings account is best up to tax paying point because you can get the money out more readily. Easy as an app transfer. I had to clear a cash ISA a few years back and it was annoyingly paperwork heavy.

BTW I've been on a journey of improvement. New job, better pay, better finances, ability to save regularly, increase pension contributions (employer matches to a point), company share save scheme (big company currently booming), etc. Just worked out energy supplier is good. Can only save a tenner by switching but with FiT payments on solar it's not worth the hassle for a tenner. Especially since current supplier is dropping rate. All these things I can now do because of a higher headroom due to better pay and the resulting personal confidence. It just means I have questions.

 

[Sterlo]

You are correct in what you say, however if you get an Easy Access ISA, they're as easy to get money out of as a standard savings account. It's your call at the end of the day, a basic account often pays slightly more than an ISA so you could do as you say (as I do myself). If you've only a small amount to save each month, have you considered a regular saver, they often pay a higher rate for a year, then transfer it to a normal savings account (the only issue with a regular saver is they are designed to be left in, often no withdrawals are allowed).

 

[I like Skol]

Given similar, or identical, interest rates between the ISA or standard easy access savings product I would still recommend you choose the ISA.

Sounds like you are steadily improving your financial situation and that £150pcm might soon double or more, plus you might get unexpected lump sums from bonuses at work, an inheritance, or some other change in circumstances and suddenly you find you are above the allowance for tax free interest. Your ISA allowance is annual, and you cannot use previous years unused allowance should you suddenly realise that maybe your savings should have been in the ISA system all along.

Use your ISA allowance now and if it is slightly more complicated to extract then that is possibly a benefit as it slows down any impulse spending and gives you thinking space to decide if you really need/want to spend the cash.

 

[vickster]

Pay as much top up as you can afford into your pension especially if your levels are low for your age and circumstances. If you want a comfortable retirement from say 65, it is suggested that at age 40 you should have around 250k already in your pension pot!
Some larger corporates offer access to financial advisers, perhaps see what they say.
If you have a mortgage, pay off as soon as you can if overpayments allowed - especially if on a low fixed rate at the mo ahead of any rises

 

[Time Waster]

I actually have an accidental ISA. That might sound a bit strange but years ago I set one up to contribute towards paying off my mortgage, an equity ISA. I closed it down when I moved house, clearing it out. However something happened and I found out there was a small monthly amount still going into it each month. So I've got one. It's doing OK so I kind of left it going. I will need to sort it out and fully close it by right now I'm kind of leaving it as a secret stash I kind of don't think of if I need money quickly for something in desperation, last choice stash! At least until I've got other things sorted out that is.

 

[vickster]

I actually have an accidental ISA. That might sound a bit strange but years ago I set one up to contribute towards paying off my mortgage, an equity ISA. I closed it down when I moved house, clearing it out. However something happened and I found out there was a small monthly amount still going into it each month. So I've got one. It's doing OK so I kind of left it going. I will need to sort it out and fully close it by right now I'm kind of leaving it as a secret stash I kind of don't think of if I need money quickly for something in desperation, last choice stash! At least until I've got other things sorted out that is.

Why do you need to close it? don't forget any contributions going in, come out of the 20k annual allowance, so maybe just stop paying in and leave it?

 

[wiggydiggy]

Why do you need to close it? don't forget any contributions going in, come out of the 20k annual allowance, so maybe just stop paying in and leave it?

In hindsight after a difficult experience earlier this year I now leave any Savings accounts open with a nominal amount in to keep them open, mostly as it makes opening any new accounts with that provider much easier but also some accounts are only available to "customers who opened an account before xxxx date" and that comes in handy.

 

[Time Waster]

I just ran a calculator for savings vs mortgage overpayment. If you put £150 per month overpayment of your payment of a 25 year mortgage at 4.5% rate and 100k mortgage value then you'd pay it off over 8 years early saving 23k. Compared to same in savings account at same interest rate you're actually £1900 better off saving. However drop savings rate to 4% you're about that worse off compared to overpayment.

Mind you we bought a new house with a 5 year locked in rate not long before things went crazy with rates. I think we're on less than BoE rates. Seriously, I don't know how our mortgage provider hasn't managed to wriggle out of it. Not sure it's worth overpaying that at least on this locked in rate! What's the smug face emoji.

PS we were wavering between 2 years and 5 years locked in rate. We knew that we were not that clued up on finances so thought the longer the time before we have to look at it again the better, even if forecasts showed we were likely to be worse off. That lazy decision turned out to be a good one, lucky for us rather than good decision!

 

[Time Waster]

Why do you need to close it? don't forget any contributions going in, come out of the 20k annual allowance, so maybe just stop paying in and leave it?

I'm thinking that since, AIUI, you can't open a second ISA up I was thinking to leave paying in and stop paying in nearer but before the end of tax year. That would allow a new ISA next year if I wanted but I can't get a new one this year because of this accidental one.

 

[Time Waster]

In hindsight after a difficult experience earlier this year I now leave any Savings accounts open with a nominal amount in to keep them open, mostly as it makes opening any new accounts with that provider much easier but also some accounts are only available to "customers who opened an account before xxxx date" and that comes in handy.

I've got an old saving account I've just not bothered closing since it was in another bank, now owned by another one so I'm think it would offer this benefit for va few banks not just the one it is actually with. AIUI banking groups share this benefit across into their other banking brands.

 

[vickster]

I'm thinking that since, AIUI, you can't open a second ISA up I was thinking to leave paying in and stop paying in nearer but before the end of tax year. That would allow a new ISA next year if I wanted but I can't get a new one this year because of this accidental one.

You can for transfers, but I don't think you can transfer an Equity ISA (they don't have set interest rates obviously), you should be able to move between funds if that's a thing with your provider

 

[vickster]

I just ran a calculator for savings vs mortgage overpayment. If you put £150 per month overpayment of your payment of a 25 year mortgage at 4.5% rate and 100k mortgage value then you'd pay it off over 8 years early saving 23k. Compared to same in savings account at same interest rate you're actually £1900 better off saving. However drop savings rate to 4% you're about that worse off compared to overpayment.

Mind you we bought a new house with a 5 year locked in rate not long before things went crazy with rates. I think we're on less than BoE rates. Seriously, I don't know how our mortgage provider hasn't managed to wriggle out of it. Not sure it's worth overpaying that at least on this locked in rate! What's the smug face emoji.

PS we were wavering between 2 years and 5 years locked in rate. We knew that we were not that clued up on finances so thought the longer the time before we have to look at it again the better, even if forecasts showed we were likely to be worse off. That lazy decision turned out to be a good one, lucky for us rather than good decision!

That's ok as long as you don't have to pay tax on savings, the allowance goes down to £500 if a higher rate tax payer

 

[Time Waster]

That's ok as long as you don't have to pay tax on savings, the allowance goes down to £500 if a higher rate tax payer

Not a higher rate payer, yet! Fingers crossed for the next year!

 

[Tom...]

If you have a mortgage, pay off as soon as you can if overpayments allowed - especially if on a low fixed rate at the mo ahead of any rises

If you're on a low fixed rate, you're much better off putting the 'overpayments' into a higher yielding savings account and making a lump sum overpayment at the point of remortgaging.

Use this calculator here if you're unsure - https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

 

[BoldonLad]

I'm thinking that since, AIUI, you can't open a second ISA up I was thinking to leave paying in and stop paying in nearer but before the end of tax year. That would allow a new ISA next year if I wanted but I can't get a new one this year because of this accidental one.

from April 2024, you can open/contribute to more than one ISA in a tax year, up to your annual ISA limit (£20,000 I think it is).