cash isa question

[butteriesplease]

hi,
I am wondering if it is worth setting up a wee cash isa (I can do a fixed term one with my bank for 2 years, 4% interest rate). I can afford to put about £4K in from my bank flexi savings account.

I already have a stocks and shares isa with approx a year's salary saved so far.

I want to put money I have in a flexi savings account with my bank somewhere where it will work a bit harder for me - is a cash isa worth it??

I will leave money in my bank savings account for quick access (need to do some work in house) so the cash isa can be an additional savings pot with fairly easy access.

so, cash isa, or add to existing stocks & shares isa?? Or potentially pay off a bit of the mortgage? (which is still on a fixed term, with three years left of the fixed, and 12 years left of term)

Thank-you!

Do you currently earn above the taxable level of interest? If not, it's probably not worth it unless you can get an ISA with a higher interest rate than your savings account (usually they're a little lower).

the isa my bank offers has 4% interest rate, the flexisaver only has about 1.something%
I earn £53K pa (approx) pre tax.

ah, just now have I read and understood (maybe...) what you mean by 'taxable level of interest' (sorry ProfessorBinturong!) so, honestly not sure if that is totted up across my s&s isa, all bank accounts etc - I'd presume that it is, and in which case, I'd probably be taxed on interest in a new cash isa.

So, best bet to either use some of the funds to top up existing s&s isa, or pay off some of mortgage in that case?

You won’t be taxed on interest in an isa. Depending on your situation you will have an amount of Interest on savings which you can receive tax free. Mine is £500. Anything over that you will pay tax on , and the rate you pay depends again on your situation. You will probably get a higher rate of interest outside annual but if you pay tax at 40% and would be earning interest over and above your tax free interest amount then a cash is a would make sense

How does HMRC know how much interest you make? Does the provider report it to HMRC?

I disagree, because the ISA is an annual allowance - so even if a person is not over the interest limit this year, interest on that money in the ISA will remain shielded from tax also in future years. And they might have more interest income in the future. So unless the ISA interest rate is MUCH lower than the interest rate outside of the ISA, an ISA is still potentially interesting, not worth dismissing out of hand.

Flexibility is also a consideration. For a 2-year fixed savings deposit or 2-year fixed term cash ISA, you need to be certain of not needing that money during those 2 years. If you might need it, then it is probably better to put it into something else.

Since you are planning to keep some money in a saving account for planned spending, anything beyond that you should put into an ISA if you don't expect to need it anytime soon.

All accounts have T&Cs and for ISAs this is often related to how often you can access the money. Generally, it seems to me that the best cash ISA rates are for 1yr/no access. After the first year, open another ISA and roll the previous one into it.

Just to clarify:
Interest earned in an ISA is not included in taxable interest. That's what makes them so great!
The annual allowance for an ISA relates to how much money you can put into it not the interest rate. Currently you can only put up to £20k into an ISA, cash or s&s or a combo of the 2 (e.g. £10k in to cash ISA; £10K into S&S ISA). Generally, for long term savings, the S&S ISA gives the best return.

Interest earned in a regular/bank savings account or savings bond IS taxable and the rate is dependent on your general tax bracket. This is added up across your non-ISA accounts. If you are earning between £12,750 and 49,999.00 you can earn up to £500 in interest tax free and the rest is taxed at 20% same like your income above £12,750. If you earn more than £50K salary, your interest is taxed at a higher rate - google this for better accuracy.

** If you earn more than £49K you should be putting the amount above that into your pension before tax - your employer should be helping you do this. Paying into your pension pre-tax has 2 benefits: your main income stays in the 20% bracket and the money you earn above that isn't taxed, much less at 40%, and grows in your pension too so is worth more when you come to retire.