Isa Or Higher Rate Saver

[medsecslave]

I’ve just received a lump sum from work and am not sure whether to use a 1 year ISA paying 5.5% or Saver account paying 6.5% . I know I won’t pay tax on the ISA but would I get a better return on the saver despite paying tax? Thanks in advance

[bobbinwales]

6.5% seems high, is it a long fix>? Anyway if your savings interest is above the limit for tax free savings outside ISAs of £1000 pa (or £500 if your higher rate) then you pay tax on the extra interest... so at 20% tax the 6.5% falls by 1.3% to 5,2% making the ISA abit better

[medsecslave]

Hi sorry the saver account is 6.25% both are a one year fix. I was thinking about putting either 40K Into the saver or 20K into an ISA and 20K into a bond?

[Hopkirk]

Both those accounts sound very good rates. Can I have some of that please?

[Gizmonster]

It depends on what rate of tax you pay, although even if you're not a higher rate payer and pay tax at 20%, like bobbinwales said, the equivalent rate of the saver account is 5,2%.
However, you need to remember that you can earn £1000 in interest tax free, so it all depends on how much money you've got.
The first £15 384.62 will earn £1000 in interest in the saver account. Anything more than this and you'll have to pay interest on it so the equivalent rate will be 5.2%, so put the rest into the ISA and earn 5.5%.
Summary:
Put the first £15 384.62 into the saver account paying 6.5% and put the rest in your ISA.
This does however, assume that you won't be earning interest on savings elsewhere??

[Hopkirk]

You can only put £20,000 a year into the ISA, so I would do that and put the rest in the other one. Next tax year reassess.

[Gizmonster]

Time to re-do the maths .... you'd changed the rate as I was typing.

[medsecslave]

Thanks @Gizmonster I do appreciate it. Both accounts are with Lloyds Bank for anyone interested…

[Gizmonster]

At 6.25%, if you pay tax at 20%, the equivalent rate would be 5.00%.
However, remember that you don't pay tax on your first £1000 of interest.
£16 000 at 6.25% would generate £1000 of interest.
Put £20k into an ISA and £20k into the saver. This will maximise your interest and you'll pay minimal tax.
The saver will generate £1250 of interest and if you're a 20% tax payer you'll have to pay £50 tax.
The ISA will generate £1100 of interest and it will be tax free.

[Hopkirk]

I didn't do the maths but came out with the same recommendation.

Next tax year you can put another £20,000 into an ISA. However if these are one year promotional rates you might decide to move the funds to better yielding accounts.

[bobbinwales]

My isa provider now has a 1 Yr fix at 5.92% .....there Charter Savings Bank

[bobbinwales]

Sorry....its only 5.72%

[medsecslave]

Thanks very much everyone for your help - very much appreciated!!

[gingejbee]

This "saver" account that you refer to, paying 6%+...isn't it a monthly saver account? ie not to pay a lump sum into, but a smaller amount each month.