With the end of the tax year only a month away, making sure you use as much of your ISA allowance as possible needs to be a priority. But if you are wondering why you need to consider your ISA options and what all the fuss is about, we offer you a helping hand by giving you 5 good reasons to use you ISA allowance.
The allowance is waiting…
At the start of each financial year, HMRC set a maximum cap on how much each individual can put into an ISA over the course of the next twelve months – known as the ISA allowance. You can either invest your full allowance in an Investment ISA (sometimes called a Stocks and Shares ISA), or put up to half in a Cash ISA and the rest in an Investment ISA. This year's allowance is £11,280, which means you can put up to £5,640 into a Cash ISA.
But why should you use your ISA allowance? Perhaps you feel like it's not really relevant to you because you already have a different type of savings or investment plan, or maybe you're not sure what an ISA involves or what the options are. To give you some help our Head of Savings and Investment, Oliver Roylance-Smith, gives you 5 reasons why you should you use your ISA allowance and use it now:
1. You don't pay tax on any income or growth
Any interest received or capital gains made are not then subject to tax, whether held in a Cash ISA or an Investment ISA, and there's no need to declare it on your tax return. If you're a higher rate taxpayer this means that you get to keep hold of 40% more of your hard-earned cash than you would in a non-ISA savings account. Based on £10,000 receiving a 5% annual return, this is the difference between receiving £500 within an ISA or £300 outside of an ISA (£500 versus £400 for a basic rate taxpayer).
2. ISAs are easy to understand, even if you're a novice
Opening a Cash ISA can be as easy as opening a current account - some providers even let you do it online if you already have an account with them. You can make saving a habit by setting up a direct debit into your ISA each month. For those considering their investment options, most investments are available within an ISA, so it’s simply a case of making sure you complete the right application form.
3. You can transfer any existing ISAs
Many of us already have existing ISAs, opened in previous tax years on the basis that it was the right thing to do, and with the best intentions of receiving a good return without paying tax. However, like so many savers and investors, you may find that your ISA is no longer paying a competitive rate. This is where the ISA transfer can help - nearly all Cash ISAs and Investment ISAs permit you to transfer existing ISAs to them without charge. However, you will need to check there are no penalties from your existing provider – this is in addition to contributing this year’s allowance.
4. Help counter the effects of inflation
The impact of rising prices is a very real challenge for both savers and investors and not only is inflation looking set to remain well above target levels, there is also great uncertainty about what could happen, particularly in the longer term. Whether you choose a Cash ISA or an Investment ISA, each provides you with shelter from the taxman. The effects of receiving a net return that is less than inflation can be substantial over time, and so combining a competitive return with the tax benefits of an ISA puts you in a good position for the future.
5. If you don't use it, you'll lose it
You can't roll over ISA allowances from year to year - you have until 5th April 2013 to put money in, no exceptions. You'll start the new tax year from 6th April 2013 with a new allowance - which in 2013/14 will be £11,520 - a 2.1% rise on the previous year. Of this, £5,760 can be placed in a cash ISA.
You don’t have to wait – act now before it’s too late
The current ISA allowance is available now and many of the savings accounts and investments available via Fair Investment Company accept dual ISA applications – this means you can cover this year’s ISA allowance and your full ISA allowance for the next tax year all in one go. You can also transfer any existing ISAs at the same time so there’s no excuse for missing out on this valuable tax break – what are you waiting for?
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