Moneywise answers all your questions about tax-free saving and investing – but act quick to use your 2018/19 allowance.
If you want to start saving but are baffled by the Isa options, here’s our guide to all you need to know.
Isas – Individual Savings Accounts – will be 20 years old in April and there has never been so much choice available for savers with cash savings, investment accounts, Isas for children and Isas to help you save towards your first home or boost your pension.
What is an Isa?
Don’t get too bogged down in the jargon. Isas are just savings accounts where your money grows free of tax.
You don’t have to pay tax on anything your money earns – whether that is in the form of interest, dividends or capital gains tax.
There are six different types of Isa: Cash, Stocks and Shares, Help to Buy, Innovative Finance, Lifetime and Junior Isas.
How much can I save?
The maximum Isa limit per person is £20,000 in each tax year, which runs from 6 April. If you haven’t opened an Isa since last April you could, in theory, save £20,000 in an Isa this month and then put a further £20,000 in an Isa from 6 April 2019 (the start of the next tax year).
Is an Isa better than an ordinary savings account?
An Isa used to be the best place to start saving, as interest or returns would not be eroded by tax. But since April 2016 when the personal savings allowance (PSA) was introduced, basic-rate taxpayers can earn up to £1,000 in interest before tax, while higher-rate taxpayers can earn £500 before tax. Additional-rate taxpayers have no allowance.
As a result of this allowance, around 95% of people no longer pay tax on their savings. This has made Isas less important in the savings market, particularly as Cash Isa rates are often not competitive.
That said, for those with significant cash savings, Cash Isas are still an important tax haven. If your savings grow, you may find that in time you would reach the limit of your PSA, so using a Cash Isa before this happens can help.
Figures from financial research company Defaqto show a higher-rate taxpayer with more than £47,500 on deposit would need to use Cash Isas as well as the PSA to avoid being taxed on the interest. This is if they had their savings in top-paying instant-access accounts.
Which Isa is best for me?
There are six different types of Isa, some with excellent benefits. But they come with restrictions and conditions, so which one is best for you depends on how long you have to save, how much risk you are happy to take, what you are saving for – retirement or a first home, in particular – and your age.
You can also have more than one type of Isa at one time – so long as you don’t go over the annual limit or open more than one of the same type. The exception is between the age of 16 and 18 when you can hold both a Junior Isa (Jisa) and a Cash Isa, with up to £4,260 in the current tax year (rising to £4,368 after 5 April) in the Jisa and up to £20,000 in the Cash Isa.
Alternatively, you may want to consider an Innovative Finance Isa (IfIsa).
Launched in April 2016, the IfIsa, is a higher-risk investment Isa, which puts money into peer-to-peer loans or ‘crowdfunding debentures’. Peer-to-peer loans are where investors are matched up directly with borrowers who need money – whether that is small businesses or individuals. Crowdfunding debentures invest in a business by buying its debt.
There is the potential to earn higher returns, but you run the risk borrowers may not be able to repay their loans. There are a number of IfIsa providers available.
Some will be firms you won’t have heard of. Larger companies providing this type of Isa include Funding Circle, Lending Works, RateSetter and Zopa.
Is it complicated to set up an Isa?
It only takes a few minutes to open an Isa. Anna Bowes, co-founder of savings site Savingschampion.co.uk, says: “Opening a Cash Isa should be like opening any savings account.
“The only extra information needed is your national insurance number. Many providers can do an electronic identity check for this, so will only ask for additional information if you fail the online check.”
If you want to save or invest before the end of this tax year (5 April 2019), remember to allow yourself time to open the account and for the checks to take place before the deadline.
Can I switch Isa providers?
You can switch your Isa funds to a different provider to take advantage of a better interest rate and you can switch from a Cash Isa into a Stocks and Shares Isa and vice versa. But you must transfer the funds in the correct way.
Do not close your Isa as you will instantly lose the tax-free status. You must apply to your new provider for a transfer of the funds and then wait – typically three to four weeks – for the transfer to complete. You must transfer the whole Isa balance for savings in the current tax year. For previous years’ Isa savings, you can transfer all or part of the account.
Not all providers will accept transfers, so do your research first. You can transfer your Cash Isa into a Help to Buy Isa or Lifetime Isa – subject to the limits of those accounts. You can also switch between Help to Buy, Lifetime and IfIsas, although note there is an exit penalty for switching funds away from a Lifetime Isa into a different type of Isa. There can also be time restrictions on transferring IfIsa funds due to the nature of the underlying investments.
Must I split my allowance equally among my Isas?
You can split your allowance in any proportion you like. Rules that restricted how you split your allowance ended in 2015.
Do I need to tell HMRC about my Isa savings??
No. There is no need to put your Isa holdings on a self-assessment tax form.
What happens if I don’t use my Isa allowance?
When it’s gone, it’s gone. You cannot roll over your Isa allowance to into the following tax year. The new tax year starts on 6 April, and you begin with a fresh £20,000 allowance.
If you are considering adding to or opening a Stocks and Shares Isa, but won’t have time to decide what to invest in, some providers allow you to put your money in a ‘cash park’, so you have banked your Isa allowance but not yet invested your funds. Make sure inertia doesn’t lead to you leaving it there unintentionally – your cash is unlikely to earn any interest in a cash park.
How old do you have to be to open an Isa?
You must be 16 or over for a Cash Isa, 18 or over for a Stocks and Shares or IfIsa, between 18 and 39 for a Lifetime Isa, and under 16 for a Jisa.
Why hasn’t the Isa allowance risen this tax year?
Isa allowances tend to rise every year, at least by inflation. However, the past few years have seen some huge leaps in the allowance limit. In the tax year 2017/18, it rose from £15,240 to £20,000. This may have influenced the decision not to raise the rate this year. However, it may begin to rise by inflation again next year.
What happens to my Isas when I die?
If you are married, your spouse or civil partner can inherit your Isa, which will maintain their tax-free status for deaths on or after 3 December 2014. The funds are known as additional permitted subscriptions (APS). The surviving spouse or civil partner can reinvest the funds into a Cash Isa or Stocks and Shares Isa – or a combination of both – either with the existing provider or a new provider which accepts transfers. This is in addition to their own Isa allowance for the year.
“A Help to Buy Isa will boost my savings for my first home”
David McCulloch, 33, from Carluke, Lanarkshire, has opened a Help to Buy Isa with Clydesdale Bank and intends to save the maximum £200 a month. David, who works for Scottish Power installing power lines, hopes to realise his dream of homeownership within the next year so the Help to Buy Isa was more suitable than a Lifetime Isa, where savers have to wait a minimum of 12 months before being eligible for the government bonus.
The Clydesdale Help to Buy Isa pays 2% interest but it is the bonus that appeals to David. He aims to save £3,400 plus a bonus of £850.
“I’ve been looking at mortgage options as I am hoping to buy my first place quite soon,” says David. “My mortgage adviser mentioned a Help to Buy Isa. It seemed a no-brainer as there will be a cash boost to my savings when the time comes to get on the housing ladder.”
Jo Thornhill is a freelance personal finance journalist who has written for the Mail on Sunday and This is Money