As the end of the tax year once again draws near, so does the deadline for filling up your ISA allowance. Find out why it's still worth making the most of your ISA savings now, even though rates may not be at their best.
What’s an ISA?
Every tax year, which runs from 6th April one year to 5th April the next, every individual in the UK over the age of 16 is entitled to a tax-free savings allowance. Better known as an ISA (Individual Savings Account) this savings allowance means that you can save money up to a limit, and any interest earned on that money will be tax-free.
While all other savings accounts are taxed by deducting 20% (or 40%, ven 50% if you’re a higher-rate tax-payer) from any interest earned, ISAs are the only way to save money and earn interest tax-free.
This tax year (6th April 2011 to 5th April 2012) the tax-free allowance is £10,680 - £5,340 of which can be saved as cash and the remainder invested in stocks and shares.
This increased from the £10,200 total, £5,100 cash ISA limits that applied during the 2010/2011 tax year.
What’s so great about ISAs?
It’s fair to say that ISAs don’t always boast the best interest rates around or promise to turn your saved cash into gold. However, they have one simple benefit that makes them the best place to save your money before you consider anywhere else: interest earned will be tax-free.
In a world where much of what we earn is siphoned off to the tax-man in one way or another, ISAs represent a way to keep all of the interest we earn, rather than automatically losing 20%, 40% or 50% of it.
Imagine you were saving £1,300 in a standard savings account where interest is taxed. If the interest rate on that account was 5% you would earn £65 annual gross interest; but take 20% off that and you are only left with £52 (or £39 if you’re a higher-rate tax-payer). But if you saved the same amount in an ISA with an interest-rate of 5%, the entire £65 would be yours regardless of which level tax-payer you are.
As such it really makes sense to fill as much of your ISA allowance per year as you can, preferably up to the £5,340 mark if you are saving in cash – if you have any more to save after that you can put it in another savings account of your choice.
What happens after I open an ISA?
Your ISA allowance for this tax year is £10,680 (£5,340 of which can be saved as cash). After you’ve opened your account, and filled it to the limit as much as possible, you don’t have to leave the money languishing in the account for years to come.
Simply deposit the money you want to earn tax-free interest in your ISA, and if you later want to move it elsewhere to a higher-earning account you can do so.
However to retain its tax-free status this will require a little caution; the ISA funds will have to be transferred internally by your bank rather than withdrawn as cash by you and paid into a new account elsewhere.
If you simply withdraw funds from an ISA as cash they will immediately lose their tax-free status; as such it’s important that you arrange a transfer with your ISA provider if you want to move your tax-free funds to a new home.
How do I go about getting one?
Simply browse the different ISAs available in the ISA comparison tables. Like any other savings account, you can choose whether you’d prefer an ISA that allows instant access or one that locks your money away for a time to earn interest at a guaranteed rate.
If you choose to invest up to £10,680 in an Investment ISA, remember that there may be an element of risk involved and the value of your funds could go up or down. Otherwise if you go for a Cash ISA you can simply open an account and deposit as much as you want up to the £5,340 limit. You can also, of course, opt for a combination of cash and stocks and shares based ISA savings.
Just make sure you take advantage of your tax-free savings allowance now and fill it up before 5th April next year – if you don’t lose it, you lose it!
