This article is going to show you how to maximise your money using the best ISA rate and regular savings accounts and in turn, you will pay the government the least amount of tax. This will be demonstrated over a 3-year period. The “ISA route” is using both ISA’s and savings accounts as part of your strategy and the “Normal Account Route” is without using ISAs (which you don’t pay tax on the interest, of course).
We have to firstly create a scenario:
- Total pot of £25,500 savings (5 years’ worth of full cash ISAs at current cash ISA allowance rates)
- All accounts set at a fixed interest rate of 3%
- Limit of each year’s ISA = £5,100
- All interest calculated is not compounded – the figures will be the minimal amounts of net interest gained
- 20% tax on non-ISA interest gained
ISA Route – 2010 (Year 1)
- 2010 = £5,100
- Savings = £20,400
- Total Net Annual Interest @ 3% = £153 (ISA) + £489.60 (savings) = £642.60 net interest
Normal Account Route – 2010 (Year 1)
- Fund = £25,500
- Total Net Annual Interest @ 3% = £612
DIFFERENCE = ISA Route gains you £30.60 more interest in this first year
ISA Route – Year 2011 (Year 2)
- 2010 = £5,100
- 2011 = £5,100
- Savings = £15,300
- Total Net Annual Interest @ 3% = £153 (2010) + £153 (2011) + £367.20 (Year 2 Savings) = £673.20 net interest
Normal Account Route – Year 2
- Fund = £25,500
- Total Net Annual Interest @ 3% (x2 years) = £612
DIFFERENCE = ISA Route gains you £61.20 more interest in this 2nd year
ISA Route – Year 2012 (Year 3)
- 2010 = £5,100
- 2011 = £5,100
- 2012 = £5,100
- Savings = £10,200
- Total Net Annual Interest @ 3% = £153 (2010) + £153 + £153 (2011) + £153 (2012) + £244.80 (Year 3 Savings) = £703.80 net interest
Normal Account Route – Year 3
- Fund = £25,500
- Total Net Annual Interest @ 3% (x3 years) = £612.00
DIFFERENCE = ISA Route gains you £91.80 more interest in this 3rd year
TOTAL EXTRA INTEREST (TAX SAVED) IN 3 YEARS FOR USING THIS STRATEGY = £183.60
The bottom line is to make sure you save in your ISAs whenever possible and put your money to work in them before you have to move them to a normal savings account. Ensure you get the best ISA rate you can beforehand too.
Clare G likes to write articles relating to ISAs and how they may be an alternative, effective form of retirement planning. Take a look at her website: BestISARate.org
Keeping you informed of the best ISA rate in the UK. Now you can compare ISA rates to get the best savings rates for your money.
Article Source: http://EzineArticles.com/?expert=Clare_G