ISAs vs savings accounts - tax on interest

[vickster]

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).

Yes, I've done this, one for the 2024 already paid in 20k (and a matured transfer in) and one for transfer in from last year's ISA which matures on 1 June

 

[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.