6

I am not a very savvy investor, am new to ISAs and was wondering: where would be the best place to put £10,000 right now (March 2014)?

ISAs have tax benefits, but in general don't seem to beat inflation. Some banks are offering saving accounts with higher rates (like santander), but that also comes with fees etc.

Generally it seems like ISAs are preferred, so would I be better off just maxing out the ISA and then looking for a good savings account for the rest?

8

The cash ISA limits will be going up to £15,000 in July as part of the recently announced "New ISA" changes in the Budget, so if you don't expect any more significant amounts to save in the next tax year there's no desperate need to rush to use this year's allowance. Of course if you might have another £10,000 before next March then definitely use the £5,760 now - you'll be able to transfer it to the new scheme (or it'll be transferred automatically).

They will also be broadening the range of things you'll be able to invest in with an ISA (for example peer-to-peer loans), so I'd anticipate that over time the potential returns will improve. Note that you'll be able to keep the money in the ISA for the rest of your life, so the tax benefits accumulate.

7

Depending on your tax situation, a cash ISA will probably beat other savings accounts because you won't pay tax on it.

If you're saving over a longer term, a fixed rate ISA should offer a better deal, but of course interest rates could go up in that term.

We're very close to the end of the year now so you could put in £5760 now and the remainder next month.

Have a look on moneysavingexpert for a round up of ISA deals: http://www.moneysavingexpert.com/savings/best-cash-isa

5

Appreciate the answer has already been chosen, but thought it worth adding:

As of 2016/17 tax year, there is a new Personal Savings Allowance (PSA) in the UK which means you can earn up to £1,000 of savings interest, tax-free, every year without needing to use an ISA.

The level of PSA depends on your income tax band, as follows:

        Tax band | Adjusted net income |           Personal Savings Allowance
 ----------------|---------------------|-------------------------------------
       Basic 20% |       Up to £43,000 | Up to £1,000 savings income tax-free
      Higher 40% |  £43,001 - £150,000 |   Up to £500 savings income tax-free
  Additional 45% |       Over £150,000 |                          £0 (no PSA)

As a result, all savings accounts now pay you your interest gross – they don't deduct income tax at source. (They simply tell the Inland Revenue how much they've paid to whom, so that your tax code can be changed if you end up owing income tax on interest in excess of your PSA).

So:

  • It's no longer generally true that a cash ISA will generally beat other savings accounts because of income tax on the interest

  • It also no longer seems to be the case that Cash ISA accounts pay inferior interest rates to other savings accounts. I just checked with 3 providers and the interest rates on offer were very similar.

You still might be better off choosing the ISA as it's a permanent tax shelter that accumulates every year. (i.e. if one day you get to the point that you're earning >£5k interest – on, say, £150k savings – you won't be able to move that lump sum into an ISA in one go). Also as Nigel Harper points out in comments, you can subscribe to an ISA while also earning your PSA worth of interest on savings outside an ISA as well.

  • 2
    The PSA is £1000 not £5000, and drops to £500 if you'e a higher rate taxpayer and £0 if you hit additional rate. Also saying "whether those savings are in an ISA or not" is misleading - the PSA only applies to taxable savings so you can earn £1000 tax-free plus whatever you get from ISAs. – Nigel Harper Apr 21 '16 at 13:08
  • thanks, realised the issue (typo on £5,000) and was just editing as you wrote! I initially wrote "up to", then added the table after seeing your comment. – marktristan Apr 21 '16 at 13:19

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