There are no charges on cash ISAs but there are some to look out for with stocks and shares ISAs
ISAs by numbers £10,680your ISA allowance for the 2011/12 tax year, of which up to £5,340 can be paid into a cash ISA
£11,280your ISA allowance for the 2012/13 tax year, of which up to £5,640 can be paid into a cash ISA
5 Aprilthe end of the tax year and a key date to remember to use your ISA allowance
£98,280the total amount you could have put into ISAs since they were launched in 1999
£101,280the total amount you could have put into ISAs if you were aged over 50 on 6 October 2009* *The larger figure for the over-50s is due to their annual ISA allowance increasing to £10,200 from October 2009, while other ISA holders only had access to this increased allowance from April 2010
“Even if you don’t pay tax now, you might in the future so it’s worth sheltering as much of your savings as you can.”
For stocks and shares ISAs, the tax position depends on the type of investment you hold. If you’re investing in stocks and shares that pay dividends, after the deduction of 10% tax at source, there’s no further tax to pay. So for basic-rate taxpayers there’s no difference, but higher and additional rate taxpayers do benefit though – saving a further 22.5% and 32.5% in tax respectively. With fixed-interest investments such as gilts and corporate bonds, any income is classed as interest and treated in the same way as a cash ISA. This means all taxpayers are better off investing within the ISA tax wrapper.
You will also benefit from a capital gains tax (CGT) exemption by holding investments in a stocks and shares ISA. If you hold your investments outside of an ISA wrapper, you will be liable to CGT if you’ve made profits in excess of £10,600 when you sell them. You will be charged at a rate of 18% if you’re a basic-rate taxpayer or 28% if you’re a higher-rate taxpayer.
The annual limits Whether you stand to save a little or a lot in tax, because of the relief ISAs offer there are limits on the amount you can put into an ISA each tax year.
For the 2011/12 tax year the maximum you can pay in is £10,680, of which up to half of this, £5,340, can be in put into a cash ISA. Your ISA allowance increases each tax year in line with inflation, with the rise based on the annual increase in the consumer prices index from the previous September.The indexed allowance is then rounded to the nearest £120 to make it easy to make regular monthly payments.This means the annual allowance for the 2012/13 tax year will be £11,280, of which up to £5,640 can be saved into a cash ISA.This equates to a monthly contribution of £940, of which up to £470 can be paid into a cash ISA.
Charges Although there are no charges on cash ISAs, there are some to look out for with stocks and shares ISAs. Many funds have an initial charge, which could be anything up to 5.5%, although you can get this reduced or waived altogether through a fund supermarket. Annual charges are also common, and can be up to 2%, but again these can be waived by the fund supermarkets.
You’ll also face dealing charges if you want to buy and sell shares within a self-select ISA.These start from as little as £1.50, with many providers offering special deals for frequent traders. Some self-select ISA providers will also charge an administration fee, so you’ll need to weigh up these charges too.
It makes sense to shop around for lower charges according to Jason Witcombe, director of Evolve Financial Planning. “Investment returns are low at the moment, typically around 3.5 to 4% a year, and you don’t want to see half of this swallowed up by an annual charge,” he says.
Transfers and withdrawing money Although ISAs are fairly straightforward, there are some catches to be aware of. First, think carefully if you want to withdraw any money. Even if you want to top up your ISA later, you cannot do so unless you have any unused allowance for that tax year.The withdrawn money is viewed as part of your used allowance.
If you want to transfer your ISA between providers be aware of the rules. As well as transferring between cash ISAs or stocks and shares ISAs, you can also transfer money from a cash ISA to a stocks and shares ISA, but not the other way around. If you do want to transfer, you can move all or part of previous tax years’ ISAs but you have to transfer all of the current tax year’s contributions at the same time. Most importantly, if you’re transferring, don’t withdraw the money as it will lose its tax-efficient ISA status. Instead, complete a transfer form with your new ISA provider and it’ll do all the legwork on your behalf.
4 MONEYWISE | EASY I SA GUIDE 2012