Tax-Free ISA Allowance: Use it or Lose it

07-Sep-2009

Only a month remains until the first wave of bank customers can benefit from the higher ISA allowance introduced in the last Budget. On the 6^th October 2009, savers over the age of 50 can increase their allowance from £7,200 to £10,200, of which £5,100 can be invested into each of a cash ISA and a stocks and shares ISA.  Everyone else can benefit from the increase from 6^th April 2010.

An ISA (or Individual Savings Account) is a saving product introduced in 1999 to replace PEPs and TESSAs, and you can either use an ISA to save cash at a competitive interest rate or to invest in stocks and shares. The popularity of ISAs stems from the fact that any interest you earn from an ISA account will be tax-free, and likewise any capital growth you see from investing in shares or funds will also be tax free (with no tax to pay on any dividends you receive).

Previously, the most you were allowed to save in a cash ISA and in a stocks and shares ISA was £3,200 in each, totalling £7,200 of tax-free savings each year.  Now that this limit is on the up, it's well worth making use of the increased allowance, especially with savings accounts offering lower returns across the board than those available a few years ago.

Money that is saved in the current tax year can be added to a cash ISA or a stocks and shares ISA in the next tax year (starting April 6^th 2010), but you must transfer the full amount into the ISA at the same time.  It's worth noting that you can transfer savings from a cash ISA to stocks and shares, but you cannot transfer in the other direction.  Also, a great rate on an ISA may be dependant on you taking out another product with the provider, and that additional product may not necessarily be as competitive - so make sure the combined offering is worth your while before signing up.

 Putting at least some of your savings into an ISA could save you a considerable amount in tax.  Normally at the basic tax rate, you would pay 20 per cent tax (in the 09-10 financial year) on the interest that your money earns.  At the higher rate, you're looking at a tax of 40 per cent on your savings interest, although the 'saving rate' of tax (outside of an ISA) is 10 per cent.

 Daniel Clayden of IFA firm Clayden Associates, says "Always, always, always consider using your ISA allowance before anything else. Despite their relatively low contribution limits, they still present themselves as one of the most effective savings regimes available.  In addition, recent legislation now makes it possible for those considering an ISA but initially not wanting to invest, to effectively park their savings in cash (subject to limits) and transfer into an investment at a later date."

 As long as you are a UK resident and over 18 (or 16 for a cash ISA) you are eligible to open an ISA account.  The account must be in your name, and joint accounts are not an option.  Don't forget that you do not need to have your cash ISA and your stocks and shares ISA with the same provider, so shop around for the products offering the best returns on your money.