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I am aware of the £1,000 Personal Savings Allowance, adding this to the equation confuses me even more.

So which one would be more beneficial at the end of the year, consistently adding £1,500 every month?

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    Just as something to note, if you're earning enough to put away savings of £1500 per month then you may be earning over the 40% rate. If that's the case then your personal savings allowance drops to £500
    – Matthew Steeples
    Jun 3, 2018 at 17:13

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It depends on the conditions of your ISA account (and, assuming it is a Cash ISA, its AER%). It also depends on you financial situation.

  • With the ISA, you can save up to 20000£/year, and keep it tax-sheltered for an indefinite amount of time. 12*1500£ = 18000£, so you can definitely include everything you are currently saving inside.

  • The 0.35% savings account will net you roughly 9000£ * 0.0035 = 31.5£ which is way below the £1000 threshold of the PSA.

If you opt for the savings account, you can - in practice - forget about taxes, because the amount of interest generated is quite small anyway.

However, it is very likely that you'll keep saving for more than a year. In that case you should go for an ISA, because that way you can keep sheltered more and more savings over time. This could be specially important if in the future interest rates raise significantly, or if you decide to switch for a different kind of ISA account (e.g. a Stock & Shares ISA)

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  • Is opening a standard savings account for now and moving all the savings to an ISA next year a good option too?
    – human
    Jun 2, 2018 at 9:54
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    Good answer but you can get much better rates than .35% in ISA's last month I got 1.3% from nationwide also If you can save £1500 pm some of that should be going into a stocks and shares ISA - btw last year a single investment (about 2.2k) in a stock in my ISA would have busted this years savings limit on its own!
    – Neuromancer
    Jun 2, 2018 at 19:17
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    @human re moving cash into next years ISA as you would lose this years 20k allowance you get a new allowance each tax year.
    – Neuromancer
    Jun 2, 2018 at 19:19
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    @human Not really - the standard savings account is giving you next to nothing - and you would be also forfeiting this year's ISA allowance. In other words: The only case in which you should not wrap your savings inside an ISA is if you have already used your yearly allowance (or if you have other plans for it).
    – carrdelling
    Jun 2, 2018 at 19:27
  • @carrdelling "if you have other plans for it" doesn't really come into it. You can always take money out of your ISA. But once the tax year is over, you've lost your allowance. So unless you were absolutely 110% sure that "other plans for it" was going to happen really short term (i.e. use it within months), you should really put it in the ISA. Especially if the end of the tax year is near and you have not used your allowance !
    – Little Code
    Jun 4, 2018 at 21:53
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The rule is very simple.

Always, always, always make use of your tax wrappers (i.e. ISA & SIPP) before anything else.

Remember that tax wrappers operate on a "use it or loose it" basis,i.e. if you don't use it in a particular tax year, you cannot roll it over to the next, its lost forever. That is why it is so incredibly important to use them before anything else.

Also remember wrappers are for life. So its NOT a question of "which would be better at the end of the year", that is absolutely not the correct way to look at it. It is a question of the long-term benefits of putting in a wrapper.

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  • SIPPs, OK, if you don't need the money before retirement. But could you clarify the benefits of ISAs, seeing that cash ISAs give below-inflation interest rates - do you mean stocks/shares ISAs? Thank you.
    – nsandersen
    Jun 3, 2018 at 21:34
  • @nsandersen I'm not entirely I follow. First, if you are looking at cash, don't forget to take into account the effect of taxation on your non-ISA cash account interest. Second, the type of ISA doesn't really come into it, the long term benefits of a non-taxable wrapper is what you need to understand.
    – Little Code
    Jun 4, 2018 at 21:47
  • @nsandersen Whether its compound interest in a cash ISA, dividend income and/or capital grown in a stocks & shares ISA etc. ..... the point is that having a capital base of £20k per year PLUS all your gains (however you make them) tax-free ...... well..... you would be pretty stupid to pass on that offer. Hence giving priority to ALL tax wrappers where you can. It is a rare generous gift from the tax man ... grab it with both hands !!!
    – Little Code
    Jun 4, 2018 at 21:49
  • @nsandersen Finally. Do not underestimate SIPPs. There is more to it than "ok if you don't need money before retirement". Think about, for example, the benefits of taking salary sacrifice from your employer and having them make SIPP contributions on a pre-tax basis.
    – Little Code
    Jun 4, 2018 at 21:57
  • @nsandersen It is great that the gains from ISAs are tax-free, but so is the saved interest rate of almost 3% on an offset mortgage, for instance. If the cash ISA rates increase in the future, sure, I understand, but that might be a while. I understand the point of salary sacrifice into a pension, I just meant to say that money is not easily accessible.
    – nsandersen
    Jun 5, 2018 at 11:09

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