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ISA Guide
Our helpful guide to tax efficient savings
Want to know how you can save and invest tax-efficiently with an ISA? Confused by the options? Our guide explains the basics.
An ISA is a tax efficient way to save and stands for Individual Savings Account. An ISA lets you pay little or no tax on the interest your savings and investments make.
There are two main types of ISA:
- Cash ISAs, which are classed as tax-free (i.e. you are not taxed on the interest earned on UK income)
- Stocks and shares ISAs, which are classed as tax efficient.
Paying money into an ISA is called a subscription. You can subscribe to one cash ISA and one stocks and shares ISA in every tax year, and there's a maximum allowance you can pay into each one.
ISAs are a good idea whatever your savings goal. With certain types of cash ISAs, you have instant access to your money, making it a flexible way to plan your finances.
Having an ISA is also a great way to save tax efficiently as an additional part of your long term financial planning. Stocks and shares ISAs are intended as a medium to long term investment which means they should be held for at least 5 years.
It's important to remember that ISA allowance limits apply to everyone on an individual basis, so if you're married or in a relationship, you can both hold your own ISA, each with the full allowance.
To subscribe to an ISA:
- You must be aged 16 or over to hold a cash ISA, or 18 or over to hold a stocks and shares ISA
- You must be a resident in the UK
- You can only subscribe to one cash ISA in a tax year, which runs from 6 April in one year to 5 April the next year
- You can subscribe to one cash ISA and one stocks and shares ISA in a tax year, but there are limits to how much you can save in each ISA – see the following section ‘How much can I put into an ISA'
As ISA savings are tax efficient, there's a limit on the amount you can put in. For the tax year 6 April 2013 to 5 April 2014, the overall limit is £11,520, you can use this allowance in a variety of ways:
With an ISA allowance of £11,520, you can:
| Save up to £5,760 in a cash ISA |
| or |
| Save up to £11,520 in a stocks and shares ISA |
| or |
| Save up to £5,760 in a cash ISA and put the remainder of the £11,520 allowance into a stocks and shares ISA |
If you put less than the full amount into a cash ISA, you can use the rest of that limit to add into your stocks & shares ISA limit. For example, if you only choose to put £2,000 into a cash ISA, you can put up to £9,520 into a stocks and shares ISA. These limits typically increase from tax year to tax year.
If you withdraw money from your ISA, you cannot reinvest it in the same tax year if your total deposits will exceed your yearly allowance.
| Your cash ISA yearly limit | £5,760 |
|---|---|
| You pay into your cash ISA | £2,100 |
| Your remaining tax-free allowance is | £3,660 |
| You then make a withdrawal of | £500 |
| Your remaining tax-free allowance is still | £3,660 |
| Overall possible saving by end of tax year | £5,260 |
Cash ISAs can come in two forms:
- Variable Rate ISAs, which offer rates that can move up and down, and normally offer instant access to your money or a short notice period
- Fixed Rate ISAs, where the rate is fixed for a period of time, and conditions often apply when accessing your money early
Your choice of stocks and shares ISA
You can choose from two types of stocks and shares ISA:
- Self-Select ISAs, where you choose what you want to invest in
- Managed ISAs, where a team of experts manage your investments for you
With stocks and shares ISAs, the value of your investment and any income you may receive can go down as well as up and you may not get back your original investment.
Making future subscriptions
You can subscribe to a fixed rate cash ISA for a single tax year, but it can be fixed for a longer term, sometimes up to five years. In the next tax year, you can then open a new cash ISA which can either be fixed rate or variable rate.
You can keep a variable rate cash ISA and a stocks and shares ISA open year after year, paying into them in subsequent tax-years, up to your yearly allowance. However, if an entire tax-year goes by without a deposit being made into your cash ISA, you cannot make any further payments into it until you have reactivated your account.
How to reactivate an ISA
To reactivate your cash ISA and carry on saving into it, you simply need to complete a reactivation form. Contact your ISA provider for a form, fill it in and return it, and your ISA will be reactivated for you.
Transferring an ISA
You can only have one cash and one stocks and shares ISA per tax year. If you want to move your current or previous cash ISA balances between providers, there's a set way to do it, through the transfer process, which safeguards your tax-free entitlement.
Some cash ISA transfers can take up to 15 working days to process, and your new ISA provider will start to pay your interest from day 16 if the transfer process is not complete within this period. This allows you to start earning interest from your new cash ISA account faster.
Don't forget to make sure that your new cash ISA provider allows transfers in, and that you open your new account in advance. It is possible to transfer your cash ISA balances into a stocks and shares ISA, however it is not possible to transfer stocks and shares ISA balances into a cash ISA.
If you already subscribe to an ISA, you can continue saving in your existing ISA in the new tax year, or you can open a new ISA as follows:
You can subscribe to one cash ISA and one stocks and shares ISA in a tax year, but there are limits to how much you can save in each ISA – see the section ‘How much can I put into an ISA?' above.
Don't forget the tax year ends on 5 April – make sure you take advantage of this years' allowance before it's too late.
You will normally need the following information when setting up an ISA:
- Your National Insurance number
- One form of evidence of your identity (a current passport, full UK driving licence, a benefit book or a UK armed forces identity card)
- One form of evidence of your address (an original gas, electricity, phone or council tax bill, an original bank or building society statement)
All documents should be the most recent you have, and from within the last six months.