For both savers and investors, the start of the new tax year brings with it a new and increased ISA allowance which is available to use now, even if you invested last year’s allowance right at the last minute. We take a look at how much you can invest and what tax savings are to be made by acting now.
It is strange why so many wait until the end of the tax year and miss out on the benefits of holding an ISA for up to an entire year. For those who can, maximising your allowance as soon as possible allows you to benefit from tax efficient returns – so why wait?
If you’re looking for growth, then you can receive a whole year knowing it will not be subject to capital gains tax whilst if you are looking for income, why not make it tax free for the year rather than wait until towards the end of the tax year?
The new 2013/14 tax year
The new tax year runs from 6th April 2013 to 5th April 2014 (known as the 2013/14 tax year) and you must use your allowance within that timeframe or you will lose it – ISA allowances cannot be backdated or carried over.
Two types of ISA allowance
There are 2 types of ISA allowance – a Cash ISA allowance and an Investment ISA allowance (sometimes referred to as a Stocks and Shares ISA). Every individual in the UK over the age of 16 for Cash ISAs and age 18 for Investment ISAs has an ISA allowance.
The limits for the two types are as follows:
Cash ISA allowance
The Cash ISA limit for the 2013/14 tax year is £5,760. Any amount up to this limit can be made into a Cash ISA with one provider.
Based on a fixed return of 5%, the tax saving between maximising your Cash ISA allowance at the start of the tax year rather than waiting until the end of the tax year could be up to £57 for a basic rate tax payer and £115 for a higher rate tax payer.
Investment ISA allowance
The Investment ISA (or Stocks & Shares) limit for the 2013/14 tax year is £11,520. You can invest this maximum provided you have not made any use of your Cash ISA allowance. If you have made a contribution to a Cash ISA during the current tax year then you are able to invest the remainder of the £11,520 allowance into an Investment ISA. For example, if you put the maximum into a Cash ISA during the tax year, you are still able to put up to an additional £5,760 into an Investment ISA.
Based on a yield of 7%, the tax saving between maximising your Investment ISA allowance at the start of the tax year rather than waiting until the end of the tax year is around £161 for a basic rate tax payer and £322 for a higher rate tax payer.
The allowance is per person
Remember, each ISA allowance is per person, so if you are married or have a partner, the totals permitted are doubled since each of you is able to contribute up to the maximum.
You can also transfer ISAs from previous tax years. All previous Cash ISAs can be transferred into a new Cash ISA (subject to the terms and conditions of the new plan) and most Investment ISAs will accept transfers from both previous Cash ISA as well as Investment ISAs.
You should note that once you have transferred a Cash ISA into an Investment ISA, you cannot then transfer it back to a Cash ISA.
The cumulative effect
Always remember that the beneficial tax treatment is maximised over time when the full effect of tax-efficient compound growth is achieved. If you had put the maximum into a Cash ISA for each year since 1999, this equates to over £56,000 whilst the maximum into an Investment ISA each would equate to over £121,000, all of which would also benefit from tax free income and growth.
Assuming 5% annual interest on your Cash ISA and 7% growth each year from the Investment ISA, this would increase these balances to a little over £80,000 and £196,000 respectively – remember, this is per person!
These amounts go some way to highlight the importance and benefit of putting the maximum into this valuable tax break - and with the very real threat of inflation in the coming years, you need all the help you can get to make the most from your money.
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No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.
Tax treatment depends on current legislation and your individual circumstances which may change in the future. Before transferring an ISA please check there are no penalties for withdrawal from your existing ISA provider.
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