Your number one savings priority, if you haven't done so already, is to open a cash ISA. Priority number two, if you haven't done so already, is to fill your cash ISA account to the max (that's £5,640 for tax year 2012/13) as soon as possible. Why? Because the interest paid to you in your cash ISA is tax free. As a legal requirement all banks & building societies are obliged to deduct tax from your interest before it's paid over to you in all other savings accounts - but not so in your cash ISA. The full interest is yours to keep. And, as long as your interest rate is beating inflation, they are completely risk free. You also don't have to declare them on your personal tax return.
Cash ISA details
Cash ISAs were launched in 1999 and run in line with the tax year - 6 April to 5 April. Whilst they have had a name change over the years (previously known as the Mini ISA) they now come in two forms: a variable rate ISA where the offer rates can move up and down (but typically allows instant access to your money) or a fixed rate ISA in which the rate is fixed for a period of time. With the fixed rate ISA there are often conditions applied when accessing your money so do ensure you check first. At the beginning of each new tax year you are given a new tax limit (from 2012 the limit will rise in line with the Retail Price Index). So, for example, if you opened a new cash ISA account in 2009/10 and paid in £3,400, you would have been able to pay in a further £5,100 in 2010/11 giving you a paid in balance of £8,500 earning interest tax free.
How much tax will I save?
If you're a basic rate taxpayer, for every £1 you earn in interest you'll be keeping an extra 20p from the taxman and pocketing it yourself. If you're a higher rate taxpayer then you would normally be paying 40% on your interest so that's 40p in every £1 of interest. Soon adds up doesn't it?
Who can open a Cash ISA?
You have to be a UK resident or a Crown employee (member of the armed forces, diplomat etc) or the husband, wife or civil partner of a Crown employee. You also have to be 16 years old to open a Cash ISA (slightly older for an Investment 'stocks & shares' ISA). If you are a UK resident who subsequently decides to move abroad - you will not be able to continue putting money into your ISA although you are able to keep your existing ISA (with the exception of Crown employees who may continue to do so). On your return you can begin to deposit money again.
Can I have more than one Cash ISA?
No, unfortunately you can only subscribe to one cash ISA.
Moving money in and out of your Cash ISA
The key here is remembering that you cannot pay more than the tax limit into your Cash ISA (£5,640 for 2012/13) but you can withdraw what you like from the account. For example, if at the beginning of the tax year you paid in your full annual limit but half way through the tax year you withdrew £500 from your account - that money would not be able to be replaced/topped up again. If, however, at the beginning of the tax year you only paid in £3,000, for example, and then withdrew £500 you would still be able to pay in a further £2,640. If you oversubscribe to your ISA then any funds you have paid in over and above the limit of the ISA for that tax year will be returned.
Transferring your Cash ISA to another Cash ISA
As long as the provider agrees to the transfer you are able to transfer money saved in your Cash ISA to another Cash ISA. Unfortunately, not all providers accept transfers so it really is something you need to check before you sign up. If they do accept the transfer then you will need to ask your new provider to organise the transfer - you must not simply withdraw the money yourself from your old Cash ISA account. The reason for this is that you will lose the tax advantage. It's always worth considering switching your Cash ISA if you feel like you are not getting a competitive interest rate. You can compare Cash ISAs in our comparison tables here. From 31 December 2010 the time taken to transfer between cash ISA providers will be reduced from 23 to 15 working days.
Transferring your Cash ISA to an Investment 'stocks & shares' ISA
If you currently have a Cash ISA then you are able to transfer money saved in the current tax year in to an Investment 'stocks & shares' ISA (see below) but you will have to transfer the whole amount saved in that tax year up to the day of transfer. You are also able to transfer some or all of the money you have saved from a previous tax year from your cash ISA to a 'stocks and shares' Investment ISA without any effect on your annual ISA investment allowance for that current year. Bear in mind, however, that the money transferred is treated as if it had been invested directly.
Transferring your Investment 'stocks & shares' ISA to a Cash ISA
Unfortunately, you are unable to transfer money from an Investment 'stocks & shares' ISA to a Cash ISA so you really must think very carefully before making a decision to move your money out of Cash ISA - you won't be able to move it back.
Where can I get a Cash ISA?
You can get a cash ISA from almost all banks & building societies - take a look at our comparison tables to see some of our best ISAs. However, you may wish to go to the NS&I (state-run) National Savings & Investments; Financial Advisors and now even some supermarkets and retailers have Cash ISA offerings. All ISA managers must be authorised by the Financial Services Authority before HMRC (Her Majesty's Revenue & Customs) approve them as an ISA manager. Do note, however, that approval does not mean that HMRC guarantees the ISA manager's performance.
What's an Investment ISA (Stocks & Shares)
A Stocks & Shares ISA gives you the potential for higher levels of growth than a cash ISA. It allows you to put money in to differing investments, for example unit trusts, open-ended investment companies (OEIC) or government and corporate bonds. An Investment ISA should be considered more as a medium to long-term investment and is designed to give you a tax-efficient return over years, not months. The 2012/13 investment allowance is £11,280 but any money invested in your cash ISA has to be deducted from this. For example, if you have put £3,000 in to your Cash ISA for this tax year then the maximum amount you have available to invest in a 'stocks & shares' ISA is £8,280. There are two types of Investment 'stocks & shares' ISAs: 'Managed' ISAs where experts manage your investments on your behalf or 'Self-Select' ISAs where you choose the areas you want to invest in.
Warning: Bear in mind that Investment ISAs aren't always risk free and that your asset might not necessarily always go up in value - there's a chance that it could go down. Be warned also that if you decide to buy share-based investments through an investment ISA then it will only save you tax if you are a higher-rate tax payer. Corporate bonds and any other interest bearing investments are tax-free, and therefore suitable for everybody.
To compare ISAs from the UK's leading providers click here.
Author: KYM Editor
knowyourmoney - company information
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William Allan Muggleton wrote:
very well explained and informative.As you mentioned transfering an ISA should only take 15 days.I have just transfered an ISA and it has taken 28 days and I still have not received confirmation.Regards Mr.Muggleton.
Friday, May 18 2012