The annual ISA allowance has just been reset but it’s still always a good time to start thinking about your savings.
More than half of the UK’s 30 million taxpayers did not use an ISA last year.
We explain what they are, how to make the most of them and what’s set to change in 2014.
What is an ISA?
It’s called an Individual Savings Account. Everyone over the age of 16 gets an annual allowance of £11,520 – up to £5,760 can go into a cash ISA. The rest can be invested into a stocks and shares ISA.
This means you don’t have to pay 10% tax on any income you make from your savings.
The ISA limit is reset on April 6 each year, according to the way the tax year works.
You get this allowance each year but if you don’t use it you cannot roll it over and it’s gone forever.
If you’ve never had one before
If you’ve never had an Isa before then you should think about opening one now, so you can continue to save in it during tax year which has just been reset on April 6.
Wait, isn’t the limit going up?
Yes! The annual allowance is rising to £15,000 from July this year – and you can fill it up with cash, not stocks and shares. This was announced in the Budget (read our guide to how the Budget affects you and your family here.)
This does not affect your allowance for this tax year, which begins on 6 April. The temporary allowance from April 6 goes up to £5,940 for cash ISA’s. Then from July it goes up to £15,000.
How do they work?
It’s just like a normal savings account – so you can take the money out whenever you want, the only difference is that the interest (so the money you earn from it) isn’t taxed.
Normally any money you make in a savings account is taxed – at 20% if you’re a basic rate tax payer.
You’re allowed more than one ISA, but only if it’s opened in a new tax year. There are two types of accounts, easy access and fixed. Easy access accounts mean just that. You can access your cash whenever you need it. Fixed accounts mean you cannot withdraw the money until a certain time without losing any of the interest you’ve earned.
Rates are so low, what’s the point?
It’s true; rates are at an all-time low. This is because low interest rates have pushed down the amount that banks and building societies are willing to set savings accounts at. But just because rates are low it doesn’t mean you should have an ISA. In fact, it’s more important than ever to shelter your money from the taxman.
If you have one, should you switch?
Yes, definitely. You can transfer the balance to a new ISA – it’s best to do this before the new tax year to make the most out of your limit. If you’ve already got an ISA then it’s probably not going to be one of the best rates as banks and building societies tend to keep the headline rates for new customers.
How to transfer your ISA
Don’t just with draw your money and move it to another account yourself as you will lose all the tax free benefits.
Ask your old ISA provider for an ISA transfer form and give them your new account details. This means your bank will treat it as an ISA transfer and not an account closure. Alternatively, when you open a new account your new provider might be able to arrange your old ISA to be transferred for you.
Where should you put your money?
Here are goodtoknow’s top three picks
Santander Direct ISA Saver
Minimum deposit: You must open or transfer at least £500
Best for: Those that want to transfer an old ISA balance. You can take the money out at any time. After the first year the rate drops to 0.5% on balances under £10,000, 1.5% on balances over £10,000 and 2% on balances on or over £25,000. Make a note of the date you opened the account so you can transfer out to get a better rate. You can access this account online, via the phone or in a branch.
Visit the Santander website for more information.
Halifax Eighteen Month Fixed Isa
Minimum deposit: You must open or transfer at least £500 within the 2014/15 tax year.
Best for: Those who want to fix their savings. You can operate this ISA online, by phone, by post or by visiting a Halifax brand. It’s a fixed ISA though, so you can’t withdraw any money unless you close the account. You can also transfer a balance from another provider.
Visit the Halifax website for more information
Do you have any questions about ISAs or savings accounts? Let us know in the comment box below and we will get back to you.
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