Is an ISA best if you don’t pay tax?

[PersephoneParlormaid]

DD is at Uni and doesn’t work, so pays no tax. She’s getting an inheritance soon. Is an ISA best or, as she doesn’t pay tax, is a high interest account OK ?
She doesn’t want a LISA

Work out how much annual interest she will earn on the inheritance. If it’s more than £1000, then an ISA could be better. It would depend on the interest rates offered.

She can earn up to her tax allowance in interest
How much is inheritance? 20k 200k 2milliion? That will affect the answer

There's also an extra savings allowance if income is less than around c £17k too. Have a search on HMRC.gov.uk savings allowance.

Yes, I overlooked that. Plus the 1k personal savings allowance.

It’s about £7K.
Just out of interest, at what point does an ISA make sense ?

Isa all the way

Just see what best intetest rate is
7 k at 5 % is 350 well within 1000 limit

ISA is best anyway as it'll be able to stay in the ISA (and still earn tax free interest or dividends/gains if she does a shares ISA) even when she is earning and tax paying.

Unless she’ll never have to pay tax an ISA is a good idea because so long as the money stays in the ISA, the income ( interest, dividends or capital gains) will always be tax free.

for £7k I cash really wouldn’t bother with an ISA - unless she is likely to save up significantly more in the next few years there’s no point

ISA because once the money is in the ISA, it is safe from tax forever. So even if she starts paying tax in future, she will have the money in the ISA without having to think about tax. And if she can add to it, it will keep growing.

ISA a good option since will always be tax free, make sure she knows that she needs to transfer it direct into another ISA when matures, if she puts it into her bank account for instance it will lose it’s tax free status.

You should always put it in ISA’s so in the future if she’s a tax payer she never has to worry about it

This is what I don’t understand, and yes I could Google it, but how do you remove the money and keep the interest without being taxed when you want to use it?

I’m thinking this if she can get an account with a similar interest rate. The only good thing I can see about an ISA for her is that the interest rate can be fixed.

A new ISA will have a ‘transfer in’ option that you need to select to shift an existing ISA in, it is quite easy, however important to remember. If she is new to it it’s easy to overlook.
You could look at other savings options and their interest rates, ISAs are great, however as others have said she is likely to be well below the personal allowance for a while if a student. Martin Lewis at moneysavingexpert is great at explaining all this.

Because it's tax free, there's no tax when you take it out or when you spend it.

If you move it to a non tax free account, any new interest from then on will be taxable. But she's got quite a way to go before she pays tax, though she presumably will do one day so if she has no plans to spend it then it's better in an ISA. They often have better rates too, not just the fixed ones.

There are plenty of fixed rate accounts that aren't ISAs, look for "bonds". Nationwide does them, for example. I've just had one that was 5.5% come to an end.

This is what I would like to know too, i pay no tax because of illness I can’t work and probably never will.
I have savings and keep thinking should I get an ISA but normal savings rates always seem to be higher so I don’t see the point atm. But when I retire I probably will end up paying tax but that’s 15 years away, don’t know what to do!
same for my DD she is 18 has savings from family currently at sixth form not working thrn uni next yr. ISA or savings account with higher interest then move it when she starts working??

I’d be putting £7k in an atom bank bond for 3 years and getting just over 4%

if your dad isn’t earning then she has a tax allowance of £12.500 before tax, then the £1000 interest allowance

The interest would be around £850 over 3 years

Normal savings rates aren't usually higher. Especially if you look at fixed rate. The post under yours mentions a fixed rate savings account at 4%, you can still get 4% ISAs. Look at Money Saving Expert website for best deals.

Remember if you're looking at regular savers, they might have a headline rate of, say, 7%, but you're only getting 3.5% on the full amount so if you have the money it's better to put that into an ISA or other savings at 4%. I know it doesn't sound better! This is only true if you have the lump sum, if you are genuinely saving from income then regular savers are a great idea.

The answer to your question depends how much the savings are. If it's over £40k I'd put £20k into an ISA this year to protect it in future when you do have an income.

If it's £100k, I'd put most of it into ISAs over five years (the max drops to £12k for cash soon).

If it's £10k, I'd just leave it outside an ISA if your income will still be quite low when you do draw pension.

What is she planning on doing with the money? ie. Is it for the longer term or does she intend to use it to buy a car with next year?

This will affect how she should hold it.

It depends on income.

If your DD is not earning and keeps her money in cash savings, she could earn £18,570 in interest each year without paying any tax. A deposit of about £462,000 at current savings rates of around 4% would be just below that threshold.

This is made up of: £12,570 Personal Allowance; £5,000 Starting Rate of tax at 0%; and £1000 of Personal Savings Allowance.

I think she has a bit of leeway yet!

On that kind of capital, there'll be no tax on the interest anyway, so an ISA would be pointless, especially as often you get a better interest rate on a "normal" savings account. ISA interest is often lower than you can get by shopping around - use the Moneysavingexpert website for best rates at the moment - plenty of non ISA accounts paying a higher interest rate than an ISA account.

Someone who has no wages nor other income can earn about £17k in interest before paying tax so a sizeable capital sum really of a few hundred thousand!

There are non-ISA savings that are fixed rate too (sometimes called fixed rate bonds).

https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/#fixedsavings

ISA. It's not just tax free this year, it's tax free forever. Presumably she will be a taxpayer in future. The fact that she wouldn't pay tax this year doesn't matter if these are intended to be long-term savings- she might be earning a million in a decade's time but she still won't be paying any tax on the inheritance she received in 25/26.