ISAs: your back-to-basics guide for 2016
An individual savings account – more commonly known as an ISA – is still considered one of the best places to put your savings because of its tax-free status, year after year.
By saving or investing in an ISA, you are effectively putting your money into a ‘tax wrapper’ which prevents the taxman from getting his hands on it.
In the run-up to the end of the tax year (5 April), you’ll hear a lot about ISAs as so-called ISA season kicks off.
This is when banks and other savings providers launch attractive rates to encourage your custom and for you to use up your tax-free ISA allowance.
If you’re new to ISAs or simply need a refresher, our guide is here to help you get up to speed:
- There is a limit to how much you can save in an ISA per tax year
The government sets the annual ISA allowance. For the current tax year, which runs from 6 April 2015 to 5 April 2016, the limit is £15,240. The allowance is not changing for the 2016/17 tax year. From April 2017, it is increasing to £20,000.
- There are currently three types of ISA – a cash ISA, stocks and shares ISA and Help to Buy ISA
Cash ISAs are simple savings accounts where no tax is due on any interest you make.
There are a loads of cash ISA products available on the market offering varying rates of interest. Some are instant access, others are notice accounts meaning you have to give advance warning if you want access to your cash. For example, seven days or 30 days.
Stocks and shares ISAs are investment-based savings products, therefore they’re riskier than cash products. You can invest in shares of companies or funds or investment trusts – pooled investment products run by a fund manager.
There are also junior cash and junior stocks and shares ISAs, which, as the name suggests, are savings products aimed at children. They work in pretty much the same way as their adult counterparts – except they have different contribution limits (£4,080) and money in a junior ISA cannot be accessed until the child is aged 18.
The Help to Buy ISA was launched in December 2015 and is aimed at first time buyers who are saving for a deposit for a property. They earn tax free interest and receive a 25% boost to their coffers from the government when they come to make a purchase.
The government adds a maximum of £3,000 on £12,000 saved so if there are two of you, you can get a £6,000 boost to your deposit. The scheme is only valid on homes worth up to £450,000 in London or £250,000 anywhere else in the UK and is available until 30 November 2019. See our full Help to Buy ISA: the facts for more information.
From 6 April 2016, a new type of ISA is launching: the Innovative Finance ISA (IFISA). This will be available from peer to peer lending platforms.
While the relatively high rates of interest make it attractive, P2P isn’t protected by the Financial Services Compensation Scheme so if anything goes wrong, you will lose your money. But the IFISA is eligible for the usual ISA tax advantages. See our full Peer to Peer lending guide for more information.
And from April 2017, you’ll be able to save into a brand new Lifetime ISA- if you’re under 40. This new style ISA is aimed at helping young people onto the porperty ladder and save for their retirement.
You can save up to £4,000 each tax year into a Lifetime ISA and receive a government bonus of 25%. That means if you save the maximum each year you will receive a £1,000 bonus each tax year from the government. But the money must either go towards your first home or their retirement.
See YourMoney.com’s Lifetime ISA guide for full information.
- You can transfer a stocks and shares ISA to a cash ISA or IFISA and vice versa
The rules state you can transfer money from one cash ISA to another cash ISA or to a stocks and shares ISA. You can also transfer a stocks and shares ISA to another stocks and shares ISA or from a stocks and shares ISA into a cash ISA. If you do this, you’ll still have the same £15,240 allowance. So as an example, if you have £5,000 in a cash ISA and you transfer it to a stocks and shares ISA, you’ll be left with £10,240 to put away.
From 6 April 2016, you’ll also be able to deposit money into an IFISA or transfer money from existing ISAs into the new scheme and vice versa. Though it’s best to check that the new provider accepts transfers, as not all will. The process has to be done via your bank or building society. If you withdraw any of the money yourself, you’ll lose the tax-free status.
- You can mix and match money in ISAs
You can have up to £15,240 in ISAs and you can mix and match between cash, stocks and shares and IFISAs. It’s a little more complicated when it comes to the Help to Buy ISA which is technically a cash ISA as the rules state you can only have one cash ISA at any point.
However, some providers such as Nationwide allow you to split your money into one of each – a cash ISA and Help to Buy ISA – though the £15,240 allowance still applies. As an example, if you put the maximum amount allowed into a Help to Buy ISA (£3,400 in your first year) you’ll be able to deposit up to £11,840 in the other cash ISA product.
- ISAs will be flexible
Currently ISAs aren’t flexible so if you put in £10,000 and withdraw it, you’ll only be able to put in the remaining £5,240. From April 2016, ISAs will be flexible which means savers can withdraw and replace their savings within the same tax year without losing the full ISA tax benefits. Stocks and shares ISA providers can also allow this facility if the flexible options are made via a cash trading account.
- ISA benefits can be passed on to your spouse
While ISAs can’t be transferred between spouses during their lifetime, they can be transferred on death to the surviving spouse while retaining their tax-free status.
The survivor can receive an increased allowance equal to the value of their late husband’s, wives or civil partner’s ISA value which they could ‘top up’ with the value passed to them on death. As an example, at the time of death (must be on or after 3 December 2014), if your spouse had saved £20,000 in their ISA, in addition to your individual limit of £15,240, you’d also get a separate one-off £20,000 ISA allowance for that tax year.