Find out how you can use your ISA allowance to save £7,200 each year tax free.
As an incentive to save the government provides each UK resident over the age of 16 with a tax free investment allowance of £7,200 every tax year (this runs from 6th April to the 5th April the following year). These are known as ISAs (Individual Savings Accounts) and funds can either be invested as cash or in stocks and shares.
(In the 2009 budget the Chancellor announced that the ISA limit is set to increase to a total tax free savings allowance of £10,200, £5,100 of which can be saved as cash. This has already come into effect for those over 50 and will apply early next year to all other savers).
The Mini/Maxi distinction that used to govern ISA investments has now been replaced with a much simpler scheme that, each tax year, allows you to save up to £3,600 in a Cash ISA and any remaining allowance up to the £7,200 maximum in a Stocks and Shares ISA.
As part of this simplification, which came into effect on the 6th April 2008, all existing Mini Cash ISAs, TESSA-only ISAs and the cash components of Maxi ISAs will be known as Cash ISAs, while PEPs and the stocks and shares components of existing Maxi ISAs will be known as Stocks and Shares ISAs.
Most banks and building societies offer a range of Cash ISA accounts. These operate similarly to ordinary, taxable savings accounts with both fixed term and instant access options available. Cash ISAs tend to be most suited to savers looking for guaranteed returns and those who need access to their money over the short term.
Stocks and shares ISAs on the other hand tend to be more suitable for those looking to invest over a longer period and, as with any investment in the stock market, they do involve an element of risk as returns are dependent on the performance of the stock you invest in. However, it is possible to mediate this risk by spreading your investments using vehicles such as fund ISAs.
During a tax year you are allowed to invest your Cash and Stocks and Shares ISA allowances with different providers, although you are only able to pay into a single Cash ISA account (held with a single provider) each year. You can however hold different ISA accounts that house previous years’ allowances with a number of different providers.
Any money you invest in an ISA gains its tax-free status immediately so you start to reap the tax-free benefits right away. However, it’s important to remember that after you use your full allowance for a tax year (whether this be the £3,600 cash or £7,200 maximum) you are unable to pay in any more funds even if you have made a withdrawal.
Despite this, you can transfer ISAs between providers, although it is vital that you do this by requesting an internal transfer rather than by simply withdrawing the money.
As with previous years’ allowances you are able to transfer funds held in a Cash ISA with one provider to an equivalent Cash ISA held by another provider, similarly with Stocks and Shares ISAs. However, as of the 6th April, 2008, you are now also able to transfer investments held as cash from previous years allowances and money invested under your current year’s Cash ISA allowance, into stocks and shares without losing the tax-free benefits.
Whether you decide to use your ISA allowance wholly to invest in the stock market or prefer to have keep some available as cash, the only important thing is that you use as much of it as possible each tax year as ISA allowances don’t roll over, so if you don’t use them, you lose them.
