What is an ISA?
If you’ve got any savings, or investments, you should have an ISA – it’s as simple as that. The reason? You pay less tax (or no tax in the case of cash savings) and therefore increase your returns.
How much can you put into an ISA?
Each tax year, you get an ISA allowance which sets the maximum that can be saved within the tax-free wrapper from April to April.
The old ISA system used to limit how much you could put into each pot – you’d either get half your allowance in cash and half in shares, or you could choose to put it all in shares.
But from 1 July 2014, the rules were almost completely relaxed. Although you still have a limit to the amount you can save £15,000 in 2014/15 (£15,240 from April 2015), you now get to choose how you split this between stocks & shares and cash ISAs. You even get to choose whether you want to split it – if not, you can use the whole amount for stocks & shares or the whole amount for cash.
How you can split your NISA allowance:
Use the maximum allowance for cash or investing. For the first time, you can put all the £15,000 (£15,240 from April 2015) in a cash ISA. Or, invest the whole lot in an investment ISA.
- Mix ‘n’ match. Split the allowance between cash and stocks & shares ISAs. You get to choose!
If you wanted to, you could invest £1,500 in a cash ISA, and £13,500 in a stocks & shares ISA. Or do it the other way around. The only rule is that, combined, your tax free ISA savings in the 2014/15 tax year don’t exceed £15,000.
- Have it all in one. Some stocks & shares ISA providers may allow you to hold cash tax-free within your stocks & shares ISA. But you’re free to open separate accounts, as above, if you prefer.
You must save or invest by 5 April, the end of the tax year, for it to count for that year. Crucially, any unused allowance doesn’t roll over – so if you don’t use it, you lose it forever. You’ll get a new allowance the next tax year, but won’t be able to contribute anything to the old ISA.
Any savings or investments which stay within the tax-free ISA wrapper will continue to earn interest and reap the tax benefits until you withdraw the money.
This means it’s possible to have substantial amounts invested tax free: £7,000 per year from 1999 to 2008, £7,200 per year until 2010, £10,200 for 2010/11, £10,680 in 2011/12, £11,280 for 2012/13, £11,520 for 2013/14 and £15,000 for 2014/15, plus the gains (interest or investment returns) made in each year.
How do the new ISA rules affect me?
The answer to this depends on what you’ve already done this year…
- I’ve not opened an ISA of any kind since 6 April 2014
If you’ve not opened a stocks & shares ISA or a cash ISA since April, then it’s business as usual for you. You can open a cash ISA or a stocks & shares ISA (or both) and invest up to £15,000 in them before 5 April 2015.
- I’ve already paid into an ISA since 6 April 2014Between 6 April and 30 June 2014, you could contribute up to £11,880 into a stocks & shares ISA, or £5,940 into a cash ISA and the rest into a stocks & shares ISA.If you’ve paid up to the limits, you’re then able to pay another £3,120 into your ISA (and this can be any combination of cash and investments that you choose). Obviously, if you’ve only opened a cash ISA before 1 July, then you can pay in a further £9,060 before 5 April 2015.Check that your provider allows additional deposits. If you’ve an easy access account, it won’t be a problem, but if you’ve a fixed rate cash ISA, then it’s worth checking your provider’s terms on further deposits. Some may not allow it, or may have a very short time window for you to make the additional deposit.
If you can’t make further deposits to an account, then it’s worth either opening a stocks & shares ISA to use the additional £9,060 allowance, or transferring your current year’s cash ISA to a provider that does allow additional deposits (you’ll need to transfer the whole amount you’ve paid this year, so watch for any penalties for closing the account early).
What ISA should you pick?
There are two types of ISA – one you can use for cash savings and one you can use for investing, though with new ISAs, for the first time, the choice is completely yours about how much you use for cash, and how much for shares.
Cash ISAs explained
Use a standard instant access savings account, and basic rate taxpayers have to give 20% of the interest earned straight to the Government. For higher rate taxpayers, this leaps to 40%, and for additional rate taxpayers, it’s 45%.
With a cash ISA, there’s NO tax to pay!
Cash ISAs are simply savings accounts where the interest isn’t taxed, meaning it’s incredibly rare for a normal savings account to pay more interest.
For a cash ISA paying 2% AER to be beaten, a basic-rate taxpayer would need a savings account offering 2.5%, while anyone paying higher-rate tax would need 3.33% – and those accounts currently aren’t out there.
Just like normal savings accounts, there are a variety of cash ISAs available, including instant access, regular savers and fixed-rate deals. You don’t have to pay to open a cash ISA. For details of the best payers, read Top Cash ISAs – it’s updated daily.
Stocks & shares ISAs explained
You can also use your ISA for investing. This type of account is called a stocks & shares ISA, where you can invest in funds (shares or bonds from various companies pooled into one investment), bonds (basically a loan to a company or a government), and shares in individual companies.
Stocks & shares ISAs are typically managed by an online service (often called an online broker or platform), fund management group or fund supermarket.
If you wish to open a stocks & shares ISA, you need to be aware that many of these companies charge a fee for you to open and hold a stocks & shares ISA. Some even charge you if you want to change any of your investments, withdraw your money or move it to another company.
Some stocks & shares ISA providers may allow you to hold some of your allowance as cash within the stocks & shares ISA. But you’re free to open separate accounts if you prefer.
Tax benefits of a stocks & shares ISA:
Placing investments inside an ISA wrapper doesn’t mean they’re tax-free, but doing it provides three tax advantages:
Remember, there’s ALWAYS a risk involved when investing, as your investments can go down as well as up. The general consensus is that it’s a long-term game – you should put money away for a minimum of five years to smooth out any ups and downs.