Last-minute ISAs: answers to your top 10 questions
The clock is ticking if you want to use this year's (2011/12) ISA allowance. If you haven't invested it by midnight on 5 April you will lose it forever. So here's everything you need to know about ISAs and how to get one.
What is an ISA?
An individual savings account, or ISA, is a wrapper you can put around a savings account or investment to shield your money from the taxman. This means you get to keep all the interest earned. "Anyone who keeps an emergency fund may wish to keep it in an ISA so the current meagre interest rate isn't penalised by tax," says Dennis Hall, founder of Yellowtail Financial Planning.
Interest paid on cash ISAs is free from income tax, while growth within investment ISAs is free from income tax, capital gains tax and dividend income tax is 10% for everyone regardless of income - outside of an ISA higher-rate taxpayers pay up to 42.5% tax on dividends.
Who can have one?
If you are over 16 and a UK resident you can open a cash ISA, while stocks and shares ISAs are available to UK residents over the age of 18. You can also open an ISA if you are a Crown employee, such as a diplomat or a member of the Armed Forces, who is working overseas and paid by the government. Spouses or civil partners of Crown employees living abroad can also open ISAs.
How much can I invest?
You can invest up to £10,680 in an ISA this tax year. You can either put all of that in a stocks and shares ISA or up to £5,340 in a cash ISA. From 6 April, the ISA limit will rise to £11,280. If you don't use your 2011/12 allowance by midnight on 5 April you will lose it, as it can't be carried over into the 2012/13 tax year.
How many ISAs can I have?
You can only open one cash ISA and one stocks and shares ISA per tax year. But in different tax years you can open ISAs with different banks or investment managers, meaning there is no limit on the number of different ISAs you can build up over time.
Which type should I opt for?
How much you invest into each type of ISA will depend on your personal circumstances. "If you are likely to need access to your money within five years and/or are not prepared to see your investment fluctuate in value, a cash ISA is likely to be more appropriate," says Anna Bowes, spokesperson for savingschampion.co.uk.
What happens if I miss the deadline?
If you attempt to open an ISA and your money doesn't arrive before the deadline then your money and paperwork will be returned to you. "It cannot be held over until the following tax year as you will have to complete a new application," says Francis Klonowski, founder of independent financial adviser Klonowski & Co.
Can I transfer my old ISAs into a new one?
You are allowed to transfer your ISA funds between accounts as long as the individual account allows it.
In order to transfer an ISA you need to approach the new provider and fill out an ISA transfer form. It will then arrange for the transfer of your funds from your existing provider.
Your existing ISA manager can't stop you from transferring funds but if you're transferring a stocks and shares ISA, it can make you pay a charge or sell any existing ISA investments and transfer the cash.
What happens in the new tax year? Can I still contribute to my old ISA?
As long as your existing ISA is still accepting deposits, there is nothing to stop you continuing to pay money in. However, if you do put money into your existing ISA in the new tax year, this will count as opening an ISA for that new tax year, meaning you won't be able to open another one until that tax year has ended.
What happens if I break the ISA rules?
If you invest more than your annual allowance into an ISA or open more than one cash or stocks and shares ISA within one tax year, you will have broken the ISA rules. If you do this, any payments above the allowance or into secondary accounts are invalid and you are not entitled to tax-free returns on that money. Contact the HM Revenue & Customs ISA helpline (0845 604 1701) and it will tell you how to proceed.
When is the final deadline?
To use your ISA allowance before the 2011/12 tax year runs out, you need to make sure your money has been received by the bank, building society or stockbroker before midnight on 5 April. There are various different deadlines to ensure this happens based on how you are planning to move your money.
Most banks and building societies, including HSBC and Yorkshire Building Society, state that the money must have reached them by close of business on Thursday 5 April. This means postal account applications will have to be sent in several days before then to ensure they are processed in time.
Deadlines for stocks and shares ISAs can be slightly later, with JPMorgan stating that it will accept payments into its WealthManager+ system up to as late as 23:55 on Thursday 5 April, so long as the payments are made online using a debit card. Interactive Investor also says it will accept payments up to the very last minute before midnight. You should check the deadlines with your ISA provider in order to make sure that you don’t miss out.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
The ISA rules allow investors to transfer money from an uncompetitive savings account with one provider into one from another provider that pays a better rate of interest. The bank to which you are transferring the money must do the transfer process, as withdrawing the money from the ISA wrapper means you lose the tax-free status. You can transfer a cash ISA into a stocks and shares ISA, but not the other way around and the current tax year’s cash ISAs must be moved whole to a single provider, but previous years’ ISAs can be split between new providers.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
Issued by a bank as part of a current account and, in a nutshell, serves as electronic cash. Unlike a credit or charge card, where you get an interest-free period before you have to settle the bill, the funds spent on a debit card are withdrawn immediately from your current account. Unless you’ve arranged an overdraft, if you don’t have the cash in the account, you can’t spend it.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.