ISAs vs savings accounts - tax on interest

[SpokeyDokey]

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.

But...

... your intial £20k ISA investment, plus its subsequent growth, incur no tax, ever! (Unless there is a radical change in fiscal policy!)

Using the £1k allowance (and as a basic rate tax payer), and your 4% pa interest figure, you could have £45k invested with no tax liability whatsoever ie £20k in an ISA and £25K elsewhere. And this is in year 1, it gets better in subsequent years.

After 10 years the figure becomes £200k (plus any interest earned making the actual figure far higher) in ISA's + £25k elsewhere with no tax liability. Etc, etc...

ISA's are a very rare Number 11 gift that you should take advantage of.

 

[MontyVeda]

Slightly old thread I know, but I've been wondering hypothetically about ISAs and taxable interest...

I win a £100K on the premium bonds and put it all into an ISA, so I'd be paying tax on the interest of £80K (?) at whatever the current interest rate is, say 4% which i reckon to be £3200 minus my 20% income tax rate would be £620 tax paid and £160 tax saved thanks to the ISA

...or have i got it completely wrong?

 

[vickster]

Slightly old thread I know, but I've been wondering hypothetically about ISAs and taxable interest...

I win a £100K on the premium bonds and put it all into an ISA, so I'd be paying tax on the interest of £80K (?) at whatever the current interest rate is, say 4% which i reckon to be £3200 minus my 20% income tax rate would be £620 tax paid and £160 tax saved thanks to the ISA

...or have i got it completely wrong?

You can't put 100k in an ISA, only 20k a year (at present) and it's not taxed.
The other 80k would need to go elsewhere, I think you can put 60k a year into a private pension, not taxed & tax relief.
Anything in bonds, saving accounts etc - the interest above £500 (high rate taxpayer) or £1000 (lower rate) a year is taxed at your tax rate. Simple example 4% in a bond on your 80k is £3200, you pay tax on £2200 or £2700 depending on your tax code (which might be what you said )
If you don't have the full 50k in PBs you can reinvest and any future winnings will be tax free (until invested)

 

[Alex321]

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!

But their definition of "comfortable" is rather a lot more income than some of us think of as "comfortable".

They seem to think that in order to be comfortable, you need (at today's rates) a gross income of around 50K or a bit more. Which is quite a bit more than the median salary (depending on what is included, that is somewhere between 30K and 39K), and most people earning the median salary will think they are reasonably comfortable.

 

[vickster]

But their definition of "comfortable" is rather a lot more income than some of us think of as "comfortable".

They seem to think that in order to be comfortable, you need (at today's rates) a gross income of around 50K or a bit more. Which is quite a bit more than the median salary (depending on what is included, that is somewhere between 30K and 39K), and most people earning the median salary will think they are reasonably comfortable.

Good grief, I posted that over a year ago

Inflation not withstanding, I am aiming for £40-50k a year for retirement to fund my planed retired life. I am used to spending and earning more. I might spend less, I might spend more, but I don’t want to be worrying about it 👍🏻

 

[BigSid]

The other 80k would need to go elsewhere, I think you can put 60k a year into a private pension, not taxed & tax relief.

You're partly correct. The maximum is 100% of your earnings up to £60000 including employer contributions and tax relief.

 

[Alex321]

Good grief, I posted that over a year ago

Inflation not withstanding, I am aiming for £40-50k a year for retirement to fund my planed retired life. I am used to spending and earning more. I might spend less, I might spend more, but I don’t want to be worrying about it 👍🏻

Yeah, it was only after I posted my response that I noticed it was a resurrected thread.

But what I said is still true. Yes, if people are used to earning a lot ore than that, then they will want a larger pension to maintain the lifestyle they are used to.

But I think most people would consider an individual income of 35-40K to be enough to be "comfortable". Probably £50K plus for a couple.

£50K for an individual is what I think most people would consider "well off" rather than "comfortable".

 

[BoldonLad]

Yeah, it was only after I posted my response that I noticed it was a resurrected thread.

But what I said is still true. Yes, if people are used to earning a lot ore than that, then they will want a larger pension to maintain the lifestyle they are used to.

But I think most people would consider an individual income of 35-40K to be enough to be "comfortable". Probably £50K plus for a couple.

£50K for an individual is what I think most people would consider "well off" rather than "comfortable".

Wouldn't that very much depend on where they were living (eg high housing cost area vs low housing cost area), and, perhaps, the number of children they have?

 

[vickster]

Yeah, it was only after I posted my response that I noticed it was a resurrected thread.

But what I said is still true. Yes, if people are used to earning a lot ore than that, then they will want a larger pension to maintain the lifestyle they are used to.

But I think most people would consider an individual income of 35-40K to be enough to be "comfortable". Probably £50K plus for a couple.

£50K for an individual is what I think most people would consider "well off" rather than "comfortable".

Yep I often spend £5k+ a year on holidays and once retired that will probably go up

 

[SpokeyDokey]

But their definition of "comfortable" is rather a lot more income than some of us think of as "comfortable".

They seem to think that in order to be comfortable, you need (at today's rates) a gross income of around 50K or a bit more. Which is quite a bit more than the median salary (depending on what is included, that is somewhere between 30K and 39K), and most people earning the median salary will think they are reasonably comfortable.

I agree with your view on the 'comfortable' projection figures that periodically get trotted out. They are overblown, imo.

We live a great life on around £28k pa - we certainly don't scrimp or scrape or go without at all.

Our car PCP (c£2.5k pa) is included in the above, too.

Only potential 'big ticket' item we don't do are overpriced (personal opinion) big holidays each year. We did all that years ago and the novelty also wore off years ago.

We are not trying to be thrifty either. Our annual income from pensions and investments is well beyond the £28k pa figure.

 

[SpokeyDokey]

Slightly old thread I know, but I've been wondering hypothetically about ISAs and taxable interest...

I win a £100K on the premium bonds and put it all into an ISA, so I'd be paying tax on the interest of £80K (?) at whatever the current interest rate is, say 4% which i reckon to be £3200 minus my 20% income tax rate would be £620 tax paid and £160 tax saved thanks to the ISA

...or have i got it completely wrong?

If you have a partner who has minimal or zero income you can save a lot of tax by saving and investing in their name.

 

[PaulSB]

Astonishing figures of what people consider sufficient for a "comfortable" retirement. 50k? 😮

We live uncomfortably well on £32k and consider ourselves fortunate and well off.

 

[vickster]

I agree with your view on the 'comfortable' projection figures that periodically get trotted out. They are overblown, imo.

We live a great life on around £28k pa - we certainly don't scrimp or scrape or go without at all.

Our car PCP (c£2.5k pa) is included in the above, too.

Only potential 'big ticket' item we don't do are overpriced (personal opinion) big holidays each year. We did all that years ago and the novelty also wore off years ago.

We are not trying to be thrifty either. Our annual income from pensions and investments is well beyond the £28k pa figure.

I like big expensive holidays 😄 I also like going out to eat, expensive in London esp once factor in transport and the like.
I'm judging what I'll spend based on what I I spend currently plus more as I'll have time to fill when I'm not working 5 days a week 😄
I don't intend to leave anything behind, no dependents, an older brother, no other family by the time I reach old age

 

[kingrollo]

Your mortgage in generally paid and the kids are self sufficient - so that's two major outgoings gone.

If like me you have the unlucky gene - you're health goes through the floor once you hit 60 - so new bikes and long haul holidays are going to be very infrequent.

I imagine I will be able to bumble along quite nicely on £20k pa + state pension if I live long enough to receive it !!!!

 

[Alien8]

If you have a low income you are also eligible for the savings starter rate which is £5,000 clawed back pound-per-pound on income above £12,570.

This means you could get up to £18,570 (12,570 + 1,000 + 5,000) tax free savings interest per year if you have no other income (wages, pension, ..).