I run my own business as a sole trader and move cash from my business account into my savings to keep a pot for things like paying my bills, covering me in lean patches, and to set aside the money I need to pay my tax bill.
This means that I regularly run a fairly sizeable savings balance, often about £40,000, but also need to dip in and out of it.
I recently opened Santander’s 5.2 per cent easy access savings account but even as a basic rate taxpayer, I am now going to end up with interest payments greater than the £1,000 personal savings allowance and face tax on them.
Would it be better for me to put as much of my money as possible into a cash Isa instead, even though the rates are lower than on standard accounts?
This won’t be my main business account – this will remain as a separate current account, but will be a place that I keep the savings I need to access on almost weekly basis.
I need a cash Isa that has no limit on withdrawals per year, which a lot of good deals seem to have, and I would also like to transfer in some old Isa savings too.
Make the jump: Higher interest rates mean savers are in danger of breeching the personal savings allowance and having to pay tax on savings interest
Helen Kirrane of This is Money replies: The rise in interest rates has, by and large, been good news for savers who can now nab accounts paying interest upwards of 5 per cent.
But they need to be aware that at the moment even the easy access and fixed best savings rates fall short of inflation, which stood at 6.7 per cent in August.
This means it is important to keep as much of your interest as possible, which is where savings tax comes into platy.
Here rising rates have proven to be a double-edged sword, as they put many more savers in danger of breeching their personal savings allowance (PSA).
More than a million more savers are expected to pay cash on their savings as a result of higher rates.
Basic rate taxpayers can earn up to £1,000 a year before they need to pay tax on the interest from their savings accounts, while higher rate taxpayers have a PSA of £500. Those paying additional rate tax – earning more than £125,140 a year – get no personal savings allowance at all.
In December 2021, before the base rate started to increase, the best easy access account available paid 0.75 per cent.
This meant that you would have needed savings in there of more than £133,000 to earn more than £1,000 in interest and breach the basic rate taxpayer personal savings allowance.
You now have a top savings account paying 5.2 per cent and would need just £19,231 in there to breach the allowance.
Another way to look at this is to consider how tax lowers effective rates, we show this in This is Money’s savings tables.
As you are a 20 per cent basic rate taxpayer, with Santander’s 5.2 per cent easy access account your effective interest rate is 4.16 per cent when 20 per cent tax is factored in.
A 40 per cent tax payer would have an effective interest rate of 3.12 per cent with this account.
It’s worth noting that depending on whether you have savings earning interest elsewhere, you may earn the advertised pre-tax rate on up to nearly £20,000 of savings in there.
You have said that you have about £40,000 as your savings balance, which is more than a year’s annual Isa allowance of £20,000. However, you have also noted that you need some of this money for things such as your tax bill. It would be worth considering using money from taxed accounts first for these things, keeping as much as you can protected within the tax-free Isa wrapper.
We savings asked experts what would be best to do in your situation.
Would your savings be better off in a cash Isa
Andrew Hagger, founder of personal finance website MoneyComms replies: If you’re in danger of exceeding your annual personal savings allowance (PSA) then a cash Isa is a sensible option.
A standard savings account offers a slightly higher rate of around 5 per cent but if you’re going to pay 20 per cent tax on that savings interest it means your net return is 4 per cent, so a cash Isa will put more money in your pocket rather than handing it over to HMRC.
Anna Bowes, co-founder of savings website Savings Champion replies: Cash Isas are a good idea if you can no longer avoid paying tax on your savings, even though in many cases the rate would appear to be less on the Isa than the equivalent taxable account.
So you need to take a look at what you would earn after tax on the standard account, compared to the tax-free interest on the Isa.
For example, the best taxable account offering unlimited access is paying 5.2 – but this falls to 4.16 per cent after the deduction of basic rate tax. The top easy-access cash Isa, with no restrictions, on the other hand, is paying 4.83 per cent from Shawbrook Bank.
This Isa does accept transfers in but is not a flexible Isa. This means that if you withdraw any money from the Isa, you cannot replace it without the replacement counting towards part of your annual Isa allowance which is currently £20,000.
Limits: Savers have a personal savings allowance, which means they can earn £1,000 or £500 of interest tax-free, for basic and higher rate taxpayers, respectively
What about a flexible Isa?
Anna Bowes replies: If you withdraw any money from an Isa that is not flexible, you cannot replace it without the replacement counting towards part of your annual Isa allowance which is currently £20,000.
Flexible Isas allow withdrawals to be made and then replaced within the same tax year, without it counting towards your allowance. T
his could be important if you need to make withdrawals on a regular basis, which you would then want to pay back in, to keep the maximum in the tax-free wrapper, but are expecting to deposit the full £20,000 also.
As an example, if you placed £20,000 into a non-flexible Isa and withdrew £5,000 you would not be able to replace that money until the following tax year, and it would then form part of your new allowance. With a flexible Isa you could replace it as long as you did so in the same tax year.
The best flexible easy access Isa is the Skipton Bonus Cash Isa Saver Issue 15 which is paying 4.9 per cent – although this rate does include a bonus of 1 per cent for the first 12 months.
Andrew Hagger replies: If there’s going to be quite a bit of money going in and out of the account during the year then a flexible Isa makes sense as it means that you have the freedom to withdraw your money and, crucially, put it back again without affecting your annual allowance.
For a flexible cash Isa, Skipton Building Society’s Bonus Cash Isa is worth a look. It pays 4.9 per cent (which includes a 1 per cent bonus for 12 months) as well as unlimited penalty free withdrawals. This Isa accepts transfers in from other Isas and the minimum balance is £1.
Content source – www.soundhealthandlastingwealth.com