I was looking on ISA faq on moneysavingexpert and I noticed the following: enter image description here

I do not understand the trick, say I put GBP100 on a 3% account and that ISA pays 1%. Can I NOT pay tax on the GBP3 I made just by switching it to ISA ?


No, that's not what it's saying.

It's saying you can put £100 into a 3% account in, say, May and earn 3% taxable* for most of the year and then put it into an ISA at the start of the following year just before your ISA allowance would otherwise be lost.

This gets you the higher interest for (nearly) a year whilst still building up savings that will be tax free indefinitely.

Whether this is a good idea or not is another matter. The current situation where you can earn more interest in taxed current accounts than you can in ISAs may not last; it's something of an anomaly. If you believe that then you may also believe that in the long run it's worth making use of your ISA allowance even though in the short term it would be more lucrative to keep money in taxed accounts. This is unlikely if we're really talking about hundreds of pounds, but if we're actually talking about sums approaching or greater than a year's ISA allowance then it makes more sense.

* Note that "taxable" doesn't necessarily mean "taxed". The Personal Savings Allowance introduced in the 16/17 tax year means that many if not most people will pay no tax on their savings interest.

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    So It means "it is better to put money on the higher NET-return as long as you put the max you can on the ISA at the end of tax year" ? – statquant Apr 28 '16 at 17:07
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    It says you can get (nearly) a year at the highest net return and use your ISA allowance by switching at the end of the tax year. It doesn't say whether this is better than any other approach, and indeed that is unknowable since in large part it depends on what happens with ISA and non-ISA interest rates in the future. – Nigel Harper Apr 29 '16 at 8:57

On most accounts interest is calculated daily meaning if you had £100 in a 3%APR non isa for the majority of the year you will gain £3 but this will potentially be taxable (probably not but we'll speak about that in a second) if you then moved it into an isa for the last week you will only receive the interest on the money for that week £100 + (1%/52).

With the introduction of the personal savings allowance banks now pay all interest gross. If you are a basic rate tax payer the government will allow you to make £1000 of interest before being taxed. For arguments sake this means you could potentially save £33,333 in a 3% account (no bank would offer this rate with that balance) and still not pay any tax on your savings as that year you would earn £999 in interest.

So depending how much money you have to deposit and what interest you're going to get. As long as the interest comes to below £1000 you do not pay tax allowing you to potentially save: £100k in a 1% account or, £50k in a 2% account or, £33.3k in a 3% account Without paying any tax on your interest. Compare that with an allowance of £15240 in an isa which will pay 0.6-0.8% (depending on the bank) you would be better off avoiding the isa.

Then worst case scenario if you do have more than the above to save put the surplus into an ISA that way at least you are getting something.

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