It comes round every year. Just as spring arrives and it feels as if summer is on the way, ISA season rolls around. Whilst the first few months of the year often consist of trying to sort out your finances post the big Christmas and New Year spend, now’s the time when you start thinking a little more proactively about what you can actually save.
Whether you already have an ISA, or you’re thinking about getting sorted in the upcoming weeks, it’s always great to have a little refresher on the important elements of saving in an ISA.
What is an ISA?
ISA stands for individual savings account. In its simplest form an ISA is a wrapper in which you’re able to hold a number of different investments. They could consist of cash, stocks and shares and investment funds to name just a few. Investing through an ISA is a tax efficient way of holding these assets.
What are my ISA options?
There are two main categories of ISA, with sub-categories within the two. A cash ISA offers tax-free saving through what is effectively a deposit account for your cash. Currently you can deposit £5,640 this tax year into a cash ISA (although this is set to go up to £5,760 in the 2013/2014 tax year). Within this category, the interest rates, and terms and conditions will vary between providers.
The second category is a stocks and shares ISA. This is where the real concept of investment comes in. With a stocks and shares ISA, you’re able to invest in a variety of investment options such as stocks, shares, government and corporate bonds, etc. The ISA allowance for a stocks and shares ISA is currently £11,280 (set to go up to £11,520 in the new 2013/2014 tax year).
How many ISAs can I have?
You can subscribe to two ISAs in each tax year; one of each kind. Your combined annual ISA allowance is currently £11,280 (increasing to £11,520 in the new 2013/14 tax year). You can choose how you use this, but the maximum you can deposit into a cash ISA this tax year is £5,640 (increasing to £5,760 in the new 2013/14 tax year).
Can I transfer my ISA allowance to the next year if I don’t use it?
No. If you don’t use it in one year, it is non-transferable.
Do I have to invest the whole amount in one go?
No, it us up to you. If you have the entire amount in one go that’s great as you’ll make more of the tax incentives by using your allowance all at once. You can however, make monthly payments. It’s up to you.
What are the tax incentives?
You can save tax-free through a cash ISA; this means that you don’t have to pay any tax on the interest you earn. With a standard savings account, interest is paid once 20p in the pound has been deducted (for normal rate tax payers), however, with an ISA this is paid gross, i.e. without the 20p deduction. This is even greater for higher rate tax payers.
With a stocks and shares ISA, things are a little more complicated. When you hold investments within your ISA wrapper, you would do so in exactly the same way as outside. When you sell them, however, is where you see the difference; as they’ll be no Capital Gains Tax to pay.
Can I transfer my existing ISA?
It is possible to transfer your funds if you’re not happy with the performance of your ISA. In the lead up to the new financial year, it’s the time to make these decisions.