Why you should open an Isa
New Individual Savings Accounts, to give Isas their proper name, are an extremely tax-efficient way to save money. In fact, the beauty of Isa saving and investing is that the interest you earn from a cash account, and any gains you make from a stocks and shares account, are tax-free.
Effectively, an Isa serves as a 'wrapper' around your savings, shielding your money from the taxman.
Each year, you are given a maximum allowance you can deposit into either a cash or stocks and shares Isa, or a mixture of both. For the current tax year (2014/15), which expires on 5 April, the limit is £15,000 - rising to £15,240 from 6 April, the start of the 2015/16 tax year.
You are only allowed to open one new cash Isa and one new stocks and shares Isa a year but you are able to transfer money you have in Isas you opened in previous years into your new accounts. This means far more than the current £15,000 limit can be held in an Isa.
In actual fact, if you had used your full allowance every year since Isas launched in 1999 - when they replaced personal equity plans (Peps) and tax-exempt special savings accounts (Tessas) - you could have deposited up to £136,080 (or slightly more if you were aged over 50 in 2009/10 when a slightly increased annual limit applied).
Figures from Fidelity Personal Investing also reveal that had a saver invested the current year's Isa allowance of £15,000 into the FTSE All Share index on 31 December 2004, by the same date 10 years later their money would have grown to £31,144. But had they left it in the average UK savings account, it would only be worth £16,374. That's a significant difference of £14,770.
However, despite the potential gains on offer, and the tax advantages, £104 million is lost in the UK every year by consumers not using stocks and shares Isas to protect investments from capital gains tax. In fact, research by Prudential and Unbiased.co.uk estimates that 1 million UK households are holding eligible stocks and shares outside of an Isa, attracting tax liabilities, rather than taking advantage of their tax- free allowances.
In fact, we're wasting much more by not making the most of cash Isas and Junior Isas. Unused allowances for cash Isas total £1.2 billion. That figure is based on the fact that an additional 55 million Isas could be opened under the current eligibility criteria, and the additional interest that could be generated compared to a standard instant- access savings account.
A further £2.4 million of waste comes from not using Junior Isas, which were introduced in November 2011 to replace the Child Trust Fund (CTF).
There are still more than seven million under- 18s without a Junior cash Isa or CTF in their name. Unbiased and Prudential point out that assuming the same rate of savings activity as for existing CTF accounts, Junior Isas could generate tax-efficient savings of £435 million.
The Moneywise Easy Isa Guide 2015 is here to help you get the best out of both accounts - cash or stocks and shares - whether you're opening one for the first time or looking for a new home for your existing Isas.
On the links below, you'll find all the help you need to make sure you choose the right accounts for your needs - along with a few investment tips from the experts.
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.
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.
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.
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.