What is an ISA allowance, what is the cash ISA allowance, and how much can you earn before paying tax? We answer ten of the most common questions about ISAs
ISAs are extremely popular as a tax-free option, but what is the cash ISA allowance, how do they work, and how much can you earn before paying tax?
1. What is an ISA? Is it the same as a savings account?
An ISA or Individual Savings Account is different to a normal savings account, because it allows you to save without paying any tax on the interest you earn.
2. Are there different types of ISA?
Yes. There are cash ISAs, which are best for people looking for low-risk savings, and stocks and shares ISAs, which tend to be better as a longer term investment.
With both cash ISAs and stocks and shares ISAs there are plenty of different account options to suit different needs.
3. What is an ISA allowance? How much can you earn before paying tax?
The annual ISA investment allowance is £11,520 for 2013-14 the tax year, which runs from 6 April until 5 April the following year. Up to £5,760 of that allowance can be saved in a cash ISA, the rest of your allowance can be invested in a stocks and shares ISA. From 1 July 2014, the allowance will increase to £15,000 and can be used for stocks and shares or cash, with any amount in either.
4. Can anyone get an ISA?
To have a cash ISA, you need to be 16 or over and be resident or ordinarily resident in the UK. To have a stocks and shares ISA, you need to be 18 or over.
5. What happens if I want to withdraw money from my ISA?
Many cash ISAs are easy access, and it is easy to withdraw your money if you need it or transfer it to another account. However, with fixed rate ISAs you may be penalised if you want to withdraw your savings before the end of the fixed rate period.
Bear in mind that if you take your money out, you will not be able to pay it back in again, because of the £5,340 savings limit on ISAs. For example, if you paid £5,760 into your cash ISA, then withdrew £200, you could not pay that £200 back in at a later date, because you would already have met the contributions limit for that tax year.
6. Making the most of your cash ISA allowance
Try to secure the best interest rate you can – fixed rate deals are a good bet, particularly if the base rate continues to fall. Be wary of ISAs with an introductory interest rate – these may look appealing, but always check that the standard interest rate is competitive too. Also check that you can transfer in your ISA allowance from previous years, as not all ISA accounts allow you to do this.
You should also try to use your full ISA savings allowance – if you were to put your full cash ISA allowance £15,000 (from July 2014) into an account paying 4.25% AER, you would earn an extra £637.50 a
year – tax free. To get the best return on your money, try to invest as much as you can afford early on in the tax year, to make sure you earn as much interest as possible.
7. Is my money safe in an ISA?
With stocks and shares ISAs there is an element of risk – there is always a chance that the equities your ISA invests in could fall in value, rather than rise. With a cash ISA, just like a normal savings account, the value of your initial investment cannot decrease.
Both cash ISAs and stocks and shares ISAs are covered by the Financial Services Compensation Scheme, meaning that if your bank were to fail, your savings would covered, up to a limit of £50,000 for single accounts or £100,000 for joint accounts. Find out more about safe savings.
8. Should I swap my ISA for a savings account which pays a higher rate of interest?
While there may be some savings accounts around that offer a higher rate of interest than your ISA, remember that the interest you earn on your ISA savings is tax-free.
In fact, to get the same return on your money as an ISA paying 4.25% AER, you would need to find a savings account with an interest rate of 7.1% for higher tax brackets or 5.3% for lower rate tax payers. Savings accounts paying these kinds of rates are hard to find, so always weigh up what the tax-free benefits of an ISA are worth to you before you decide to switch to a normal savings account.
9. If I’m not getting a good rate, can I transfer my ISA?
Yes – it is simple to move your balance from the current tax year into an ISA paying a better rate.
However, if you want to move your balance from previous tax years, it is vital that you arrange an ISA transfer, rather than withdrawing your money and paying it into a new ISA account, otherwise you will lose your tax free benefits. Bear in mind that not all ISA accounts will allow you to transfer in your ISA balance from previous tax years, so always check whether or not you can transfer your balance.
Find out more about transferring your ISA.
10. How do I find the best ISA?
Make sure you shop around to find the best ISA for you. The uSwitch comparison service makes it quick and easy to compare ISAs. You can refine your results by interest rate, how much you have to save, how long you want to save for and the withdrawal notice period, to find the ISA that fits your needs.