What is your ISA Allowance?

You can invest and save with a favourable tax status through the use of an Individual Savings Account.

Types of ISAs

There are two types of ISAs, shares/stocks, and cash.

With a cash ISA, you can make cash deposits similar to other savings accounts, with the exception that this cash is held tax-free. In some cases, you can also put qualifying investments in cash ISAs, although this is rare.

With a shares/stocks ISA, the money is not invested and held as cash, but instead is put into what are called “qualifying investments.” To qualify as a shares/stocks ISA, the investment has to be at risk of losing 5% of its value. If the investment does not meet this qualification, it has to be put into a cash ISA.

How much can you put in your ISA every year?

ISA limits are split into two separate figures; one is the limit you can put into a cash ISA, and one is the limit you can put into your shares/stocks ISA. For 2010-2011, the maximum amount you can put into a cash ISA is £5,100. The maximum amount you can put into a shares/stocks ISA is £10,200, with the total amount allowable for both cash and shares/stocks ISAs set at £10,200.

What restrictions exist with ISA contributions?

Within each tax year, ISAs have certain restrictions; the tax year runs from 6 April of one year to 5 April of the next year. This affects what kind of ISA you can open, and how much you can invest cumulatively within the given year. The restrictions include the following:

* Money newly paid into ISAs in the current tax year can only be held in up to one stocks/shares ISA, and up to one cash ISA.
* You can’t pay more into your ISA in a given year than what the current limit has established, and you can only pay a certain amount of that in cash. For example, for the year 2011-2012, up to £5,340 can be held in a cash ISA, and up to £10,680 can be held in a shares/stocks ISA, with total ISA amounts not to exceed £10,680.
* Limits are not carried over from year to year, so if you don’t deposit your full ISA allowance for 2011, for example, you won’t be able to carry the excess over into 2012. Once the current year is over, the amount you can deposit to your ISA is also “reset” freshly, such that new allowances for both cash and shares/stocks ISAs for that year come into play.

In March 2010, Alistair Darling, Chancellor of the Exchequer, announced that ISA limits would rise in future years annually, with inflation, run to the nearest £120.

Can you transfer ISAs?

You can transfer ISAs from one manager to another, but there are several restrictions and things to be aware of as you do so:

As of 2008-2009, you can now transfer a cash ISA to a stocks/shares ISA, but not from a stocks/shares ISA to a cash ISA. Transferring between the two types was not possible before 2008-2009.

In addition, transfers have to be done by managers, and not by savers. If a saver should try to transfer the money manually, this is treated as a withdrawal; savers therefore cannot invest it in an ISA if they’ve already reached their contribution limit for the year.

If you do happen to withdraw and then re-deposit money by mistake, you get one “pass” in a single transfer every year. If this happens, you have to remove all money from the source account and close the account. If this is done, it’s considered an innocent error that can be forgiven. It will just be treated as though the money had ever been paid in at all. You can then redeposit the maximum subject to the annual limit, but if past years’ money is withdrawn and the current annual limit has already been reached, it cannot be redeposited.

An ISA – or Individual Savings Account, is a government scheme designed to encourage us to save. Every year, we are each given a set limit, and all interest you earn within that limit is tax-free. (Given that the tax on your regular accounts is automatically deducted, many people aren’t actually aware that they pay on tax on the interest in their accounts.)

It seems from market research carried out by various companies that one of the reasons so many people are shunning ISAs is because of the low interest rates on offer. Certainly, the fact that the Bank of England base rate is the lowest it’s ever been makes it a lot harder to find ISA rates of 5 or 6% that were once common place.

However, even with rates as they are, ISAs can be an extremely effective way of saving money. If you plan on making regular, long-term savings in to your ISA account, the savings versus a regular account can indeed be significant. Indeed, if you were to save £50 a month over 20 years, on an account with a 2% rate, you’d save £300 in tax! To put that another way, that’s like 6 months free saving, courtesy of the tax man. If you are a higher-rate tax payer or that figure become even more significant.

For those who are still looking for a potentially higher rate of return, you can still do so in a tax efficient manner. A Stocks and Shares ISA allows you to invest £7,200 a year in the stock market. The tax savings will depend on your individual circumstances as will the amount of money you earn. As investments of this nature can go up as well as down, you won’t have the guarantee that would have with a cash ISA (or indeed, with a regular savings account) but the income generated (and the tax savings) have the potential to be an active part of any investment portfolio.

Where to invest your money is an important decision, but it’s also a personal one. Before the end of the tax year, make sure you get the financial advice that you need to make the most of your savings and investments.

Fidelity is the world’s largest mutual fund company. In the UK they provide a range of savings and investment solutions for both individuals and corporations. From ISAs to pensions advice, visit Fidelity.co.uk for all your investment needs.

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People are always looking for news ways in which to make cash savings or investments. One popular method of tax-free savings is by opting to save money in Individual Savings Account (ISAs), which were introduced by the UK government in 1999 to replace PEPS and TESSAs. Whether you choose to use an ISA to save cash or invest in stocks and shares, the benefits of ISAs are sure to be diverse and hugely rewarding.

In fact, the advantages of ISAs are numerous. For starters, there is no income tax to pay if you invest in an ISA, a factor which is a particularly strong selling point if you’re a high rate tax payer. Under existing tax legislation, people paying higher-rate tax have to pay £25 income tax on every £100 received in dividends on an investment not held in an ISA. Therefore, investing money in an ISA eliminates this cost. And if you’re not currently a higher-rate tax payer, investing in an ISA now will mean that if you move into a higher tax bracket in the future, you’ll still avoid income tax on your investment.

Moreover, there are no capital gains to pay on an ISA. Capital Gains tax is a tax that is paid to the Inland Revenue on any rise in the value of savings and investments. Over the long term, small but regular payments into an ISA can generate tens of thousands of pounds – therefore, the long-term benefits of eliminating capital gains tax from your investment could be considerable, and certainly worth thinking about in advance.

Additionally, if you hold bonds in ISAs, you can still receive a tax free income. And even if you don’t want to invest in bonds at the present time, there is always the possibility that you may want to in the future. In this sense, investing in ISAs is even more beneficial. Furthermore, you won’t have to mention your investment in an ISA in your tax return form, which can be an arduous task. Ultimately, investing your money in an ISA means that you’ll no longer need to worry about tax on your investment – a factor that is sure to be a huge weight off the mind of any tax payer!

Some of the best cash ISAs can be found in a range of locations, both online and on the high street, from a variety of sources. Many government institutions offer high interest ISAs, and banks and building societies also offer a selection of ISA accounts. But, wherever you choose to make your ISA investment, you can rest assured that the benefits are sure to be plentiful.

Adam Singleton is an online, freelance journalist and keen amateur photographer. His portfolio, called Capquest Photography is available to view online.

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