10 things you need to know about ISAs
The countdown to the end of the tax year on 5 April is on, so if you haven't yet used your individual savings account (ISA) allowance, you'll need to get your skates on. If you don't use it by this date, it will be gone forever.
If you're in any doubt as to how ISAs work, or why using your allowance is so important, here are 10 things you should know about them...
1. ISAs are tax-free
You can invest £11,520 into an ISA until 5 April this year. Your annual allowance can be split, so half goes into a cash ISA while the other half can be invested in a stocks and shares ISA. Alternatively, your full allowance can be invested in a stocks and shares ISA.
For the next tax year, the government has announced that it will merge stocks and shares and cash ISAs to create a new 'super ISA' with an overall limit of £15,000 from July 1.
The big advantage of ISAs is that returns are tax-free. On cash savings held in standard savings account you pay income tax, so you earn more interest if your money is held in an ISA. Basic rate taxpayers receive a 20% boost, while higher rate taxpayers will earn an extra 40% interest and those in the top tax band, 50% more.
If you invest in stocks and shares outside an ISA, you may have to pay capital gains tax (CGT) - this depends on how much the value of your investment rises by. However, there is no CGT to pay if you invest within a stocks and shares ISA.
2. You don't have to declare ISAs on your tax return
Collecting all the paperwork to fill in your tax return can be a real chore, but any investments held in ISAs do not need to be declared, saving one bit of admin.
3. ISAs aren't only useful for the very rich
It's not only higher-rate taxpayers who benefit from using ISAs. Basic rate taxpayers who have taken advantage of their full cash ISA allowance each year since they were introduced in 1999 would be almost £5,000 richer than if they had invested an equivalent sum in an easy access savings account, according to MoneySupermarket.com research.
4. You can switch accounts
If you aren't happy with the returns you're earning, you can transfer your money to a new account. Certainly if you have money in a cash ISA from a previous tax year, it's well worth checking what rate of interest you're earning as the chances are you'll be able to get a better rate by transferring the money to another account.
You can also transfer from a cash ISA to a stocks and shares ISA, but not the other way round.
5. Don't close your existing cash ISA
If you are looking to transfer money from an existing cash ISA into a better paying account, it's really important that you don't close the old account first. If you do you will lose the tax-free status on the money because it will be classed as a withdrawal.
Instead, when you complete the application for the new account there will be a section about transfers. You just need to give the details of your existing account and your new ISA provider will arrange for the funds to be transferred. This way, you will retain the tax-break.
6. They are flexible
Most cash ISAs, unless you have chosen a fixed-rate account, allow you to get access to your money whenever you want. This makes them a good option for people looking for decent returns, but who want to be able to make a withdrawal if necessary.
They can be particularly useful for retirement planning as, unlike a pension, you can get your hands on your money at any age or if 100% of the capital is needed for any reason.
7. You don't need a large lump sum to invest
Many cash ISAs can be opened with as little as £1, so you don't need to have thousands of pounds in the bank to earn returns tax-free. If you want to invest in stocks and shares, most funds will accept monthly contributions starting from either £25 or £50.
8. You can put your money into more than one fund
If you want to invest in stocks and shares, you don't have to put your money into one fund alone. If you invest through a fund supermarket, you can effectively 'shop' online for funds from several managers. As fund supermarkets 'bulk buy' funds, big discounts are usually offered on initial charges, too.
9. ISAs can give you a monthly income
Plenty of cash ISAs give you the option to receive interest monthly or annually, which can be useful if you want to supplement your income. If you are a stocks and shares investor, then equity income funds can provide a useful income stream from dividends, as well as long-term capital growth.
10. You can open an ISA for your children
Junior ISAs enable parents to save up to £3,720 a year tax-free for their children, on top of their own ISA allowance. The accounts were introduced to fill the hole left by Child Trust Funds (CTFs), which have now been phased out. Children with CTFs can't have a Junior ISA, although parents and other friends or relatives can continue to make contributions of up to £3,720 a year into the child's existing CTF.
From July 1, the amount of money you will be able to put away tax-free in a junior ISA or CTF has been upped to £4,000.
Don't lose your ISA allowance: see details of the leading accounts
The content on this page is supplied by MoneySupermarket.com