The Benefits and Changes of ISAs

The phrase ‘end of year tax planning’ may not set your pulse racing (unlike ‘half price sales’), but perhaps it should, as many of us end up paying too much tax because we don’t make use of the ISA allowances the government gives us. But, the good news is that you do not have to be well off to save tax. For example, you may be able to reduce the tax you pay on your savings and investments with an ISA (individual savings account). However, it is also important to understand, even at this stage that the tax year ends on April 5th.

As such, an ISA is not a type of investment; it’s just a neat way of sheltering money you’re saving or investing in a tax-efficient account. In fact, there are two main types of ISA, which include: Cash ISA and Stocks and Shares ISA.

Cash ISAs are similar to ordinary savings accounts, however, with no tax to pay on the interest. Therefore, if you already have some money in a savings account, you may be better off transferring it into an ISA, as you can shelter up to ?7,200 in an ISA in the current tax year, but only ?3,600 of that can be cash. But, there is one catch with cash ISAs: once you’ve paid in the maximum annual limit, you cannot top it up again if you withdraw some of the money. So, it is important to consider what you want from your finances, before proceeding with such a move.

Furthermore, getting a good interest rate on your ISA is vital and a quick look on the internet will show you that interest rates vary widely. In fact, some ISAs will match the Bank of England base rate for a specified period, which means that if the Bank of England changes interest rates, your ISA rate will follow.

It is also important to consider investing for the longer term. Indeed, the stockmarket can behave very turbulent and possibly put you off investing in stocks and shares, but if you can accept the fact that shares will always have ups and downs (sometimes very dramatic ones) it may be worth considering. Ideally, you should be able to leave your money invested for at least five to 10 years to reduce the risks.

In addition, most stocks and shares ISAs invest in share-based funds, where instead of buying shares in one company, your money is split between many different companies (to spread the risk). However, it is important to understand that you should not invest in a stocks and shares ISA to get the tax break, particularly if it means taking on more risk than you would otherwise be happy with. But, if in doubt, consult an independent financial adviser.

Investing through an ISA also means you won’t have to pay capital gains tax when you cash it in. You can invest up to ?7,200 in a stocks and shares ISA in a single tax year or – if you already have a cash ISA in the current tax year – up to ?3,600 in a stocks and shares ISA.

But it is also important to understand that ISA rules have changed in 2008, which include:

• The overall ISA subscription limit has increased to ?7200;
• You can now save up to ?3600 of the overall ISA limit in a cash ISA;
• There is now more flexibility about how you split your money. For example, you can save ?1000 in a cash ISA and invest the remaining ?6200 in a stocks and shares ISA, or you can split it ?2000/?5200, etc up to ?3600/?3600;
• If you have saved money in cash ISAs from both the current and previous tax years, you can transfer them into a stocks and shares ISA and it won’t affect your annual allowance;
• You are no longer able to transfer money from a stocks and shares ISA to a cash ISA;
• Mini and maxi ISAs no longer exist; instead you can take out one cash ISA and one stocks and shares ISA each tax year.

The changes to ISA rules are not as complicated as would first seem, the only difficulty you may encounter is actually deciding which option is most suitable for your own personal needs.
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Victoria Cochrane writes for a digital marketing agency. This article has been commissioned by a client of said agency. This article is not designed to promote, but should be considered professional content.