5 things to know about ISAs
We’re getting to the time of year where you’ll see, hear and read lots about ISAs and the reason for that is the tax-year ends on April 5th and if you haven’t used this year’s ISA allowance by that date you’ll have lost it forever. ‘So what?’ you might say. Well the thing about ISAs is they offer a really valuable tax break but one millions of people fail to take advantage because they don’t understand what they are or how they work.
Here I explain five things about ISAs, which will hopefully result in more of you making use of your ISA allowance this year.
ISAs shelter your savings from tax
An Individual Savings Account (ISA) is a tax-free savings vehicle. Unlike other savings and investments, you aren’t taxed on returns from ISAs.
With standard cash savings accounts you pay income tax on any interest you earn. Therefore if your money is in an ISA, this doesn’t have to be paid. This means higher-rate taxpayers earn 40% more interest and those in the basic rate tax band get a 20% boost to their return. People in the top rate get an additional 50% more.
If you have non-cash investments such as shares or investment funds, your returns could be liable for capital gains tax. Again, if you invest within an ISA, you won’t have to pay this.
There are two types of ISA
If you decide to open an ISA you have a choice: you can either go for a cash ISA which is like a tax-free version of a standard savings account. Or you can opt for a stocks and shares ISA, within which you can invest in a range of non-cash assets such as individual shares, managed investment funds and commodities.
Be aware though, stocks and shares ISAs are higher risk because your returns are linked to share or bond prices and therefore the value of your investment could fall as well as rise.
You can invest £11,280
This tax year, the total ISA allowance per adult is £11,280.
You can invest the entire amount in a stocks and shares ISA or split it and put some in a cash ISA too. The maximum you can save in a cash ISA though is £5,460.
Some children can also have an ISA. Those born before September 1 2002 or since January 3 2011 are eligible for a Junior ISA. They replaced the Child Trust Fund in 2011. Parents, grandparents and other relatives can invest up to £3,600 this tax year. As with adult ISAs, there are cash Junior ISAs and stocks and shares schemes.
You must invest by April 5th
You only have until April 5th to use up your 2012/2013ISA allowance. You cannot roll it over to the next tax year, so it will be lost forever if you don’t use it.
Remember too that any money paid into your cash ISA and then withdrawn will still count towards your ISA allowance. If you put £5,640 into your account and then withdraw £1,000, you will not be able to pay any more in before the end of the tax year due to this rule.
If you want to switch to a new ISA provider (that accepts transfers from rivals), it is also vital to arrange an electronic transfer rather than physically withdrawing the funds as this too will result in you losing the tax breaks you have built up.
It pays to shop around
Cash ISA rates – and equity ISA returns – vary enormously so do your research and compare rates before you decide where to invest this year’s allowance.
If you already have an ISA but are no longer earning a good rate of interest on it, you can transfer it to a higher-paying account without losing the tax break on your savings.
When you’ve found the account you want, check it accepts transfers in (not all do). Don’t close your existing ISA; instead there’ll be a section on the application form that asks whether you want to transfer funds from an existing ISA. Your new provider will then arrange for your money to be moved over.
You can get more information on ISAs at MoneySupmermarket.
Every week, Clare Francis, financial journalist and editor-in-chief of comparison site moneysupermarket.com will offer tips and advice on all things money-related to help iVillagers make the most of their hard-earned cash. From energy bills to car insurance; credit cards to children’s savings accounts; mortgages to discount vouchers Clare will show you how to make sure you’re getting the best deal. For more, visit Clare Francis on Google+.