What's my ISA allowance?
1. What is the current ISA allowance?
For the current tax year (2013/14) the ISA allowance is £11,520. You can invest the whole allowance in a stocks and shares ISA, but the maximum cash ISA allowance is £5,760. The allowance only covers money you pay into the account, so you don't have to worry about gains reducing the amount you can pay in.
2. Where can I invest my ISA allowance?
Savers can deposit their cash ISA allowance in one of the huge number of cash ISAs available from banks and building societies. Like ordinary savings accounts you can choose between instant access, fixed rates, notice accounts and so on.
If you prefer equities you can invest your ISA allowance in a stocks and shares ISA. These are available from fund management companies direct or you can open an account with a platform that allows you to buy investments from a range of providers.
Some such as Fidelity's Funds Network just offer unit trusts but others including Interactive Investor and Hargreaves Lansdown offer self-select ISAs which allow you to also hold shares, investment trusts and exchange traded funds as well.
3. Will I pay any tax on my ISA?
Cash ISAs are tax-free savings accounts. This means that any interest you earn on your money will not have any tax deducted. You will also not pay any capital gains tax when you withdraw the money.
The rules are slightly different for stocks and shares ISAs. All growth will be sheltered from capital gains tax but some tax will be payable on dividend income. Everyone will pay 10% - for basic rate taxpayers this will be the same whether the money is held in an ISA or not, but higher and additional rate taxpayers will have to pay an extra 22.5% or 27.5% if their money isn't in an ISA.
So from a tax point of view, investors only stand to benefit from stocks and shares ISAs if they pay a higher rate of tax or if they are likely to pay capital gains tax. However as you don't need to declare ISAs or any income you earn from them on your tax return it may make sense to hold your investments in an ISA whatever rate of tax you pay.
4. How many ISAs can I hold?
There are no limits on the number of ISAs you can have over time, but in any one tax year you can only open one cash ISA and one stocks and shares ISA. It is for this reason it may makes sense for investors to open stocks and shares ISAs with providers that allow them to hold investments from a range of different companies.
5. Can I move my ISA?
It is possible to transfer ISAs from previous years to get a better deal or to consolidate your holdings – but it's important that you don't close one account before opening the new one. This is because it would count as this year's allowance rather than the allowance from the year it was opened. Your new ISA provider will provide the paperwork and move the money for you.
At the moment you can transfer a cash ISA to another cash ISA to get a better rate or if you decide your money would work harder invested on the stockmarket you can transfer it into a stocks and shares ISA.
For cash ISAs check your new provider accepts transfers. You can also transfer a stocks and shares ISA into another stocks and shares ISA, but watch out for exit charges from your current provider. Importantly, you can't transfer a stocks and shares ISA back into a cash ISA.
6. Can I open a joint ISA?
No – ISAs are for named individuals only. However there is nothing to stop married couples spreading their assets across two different accounts to double the money that can be sheltered from the taxman each year.
7. Can I take money out of my ISA?
Yes – although with some cash ISAs, such as those paying a fixed rate you may lose interest. It's also important to note that once money has been withdrawn it loses its tax benefits, so any further payments into the ISA would count towards the current year's allowance.
8. Can my child open an ISA?
Young people can open an adult cash ISA from the age of 16, or 18 for a stocks and shares ISA. Younger children can save in a Junior ISA.
9. What is a Junior ISA?
Junior ISAs are tax-free savings accounts for children. Currently all children under the age of 18 are entitled to open one, so long as they don't already have a child trust fund. Like adults, children can have cash or stocks and shares ISAs, however they can only have one of each account at any one time.
The junior ISA allowance is £3,720 for the current tax year. The money belongs to the child but cannot be accessed until they turn 18, at which point they can either withdraw the money or roll into in an adult ISA.
10. Can I take my ISA overseas?
ISAs are only open to individuals who are residents of the UK for tax purposes. If you decide to move abroad you can keep your ISAs (and maintain its tax free status) but you will not be able to open any new ones or make further contributions. The exceptions to this rule are Crown employees (such as diplomats and members of the armed forces) and their spouses or civil partners.
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.
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.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
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.
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.