Your 5 Minute Guide to the New ISA for 2016/17
What is an ISA?
Individual Savings Accounts (ISAs) are a tax-efficient wrapper for your money – they offer a way of saving and investing without paying any tax on the returns you make, whether this is income or capital gains. ISAs changed significantly on 1st July 2014 – read on to find out what these changes mean for you and your savings.
Who are ISAs for?
ISAs are available to UK residents over 16. If you are aged between 16 and 18 you can hold a Cash ISA but cannot open a Stocks and Shares ISA. Each person has their own ISA allowance for each tax year, and once it’s gone, it’s gone, so it makes sense to maximise the tax-reduction properties of ISAs while you can. ISAs should be your first savings port of call in order to avoid paying tax unnecessarily on your investments.
What is the New ISA?
In the recent Budget the Chancellor promised to increase the ‘simplicity, flexibility and generosity’ of ISAs. As a result, there will now be a single ISA which has been named the new ISA (or ‘NISA’) which gives you a bigger tax break than ever before and more flexibility about how you can use them.
When do the New ISA rules come into effect?
- These new rules came into effect on 1st July 2014
What are the key changes?
The key changes that will be brought in include:
- New ISA allowance - The ISA allowance rose to £15,000. Since 6th April 2016, the 2016/17 tax year limit is £15,240
- Improved flexibility – Savers can now split their ISA allowance between cash ISA and stocks and shares ISAs in whatever proportion they wish. This is especially welcome news for people who want to use their entire ISA allowance for cash savings.
- Increased ISA transfer potential – Savers can now transfer from a stocks and shares ISA to a cash ISA, or the other way around. Previously, transfers from stocks and shares ISAs to cash ISA were not permitted.
- Tax-free interest in stocks and shares ISAs – The pre-NISA regulations allowed transfers from a cash ISA to a stocks and shares ISA, but not the other way round. Since 1st July 2014 savers have been able to transfer from one type of ISA to the other without this limitation.
- Improved tax efficiency – You can now earn tax-free interest on cash held in a NISA. (Previously, with the exception of a Cash ISA, any cash held within the stocks and shares element of an ISA was subject to a 20% charge on the interest earned - paid to the HMRC).
- Higher Junior ISA limit – The limit for junior ISAs rose to £4,000. Since 6th April 2016 the 2016/17 tax year limit is £4,080.
How much can I hold in a New ISA?
- From 6th April 2016, the limit is £15,240 for the 2016/2017 tax year
- For a couple that means they can put aside £30,480 for this tax year which is a generous tax break.
Can I now have a single New ISA for both my cash and stocks and shares investments?
Yes, you can now hold cash tax-free within your Stocks and Shares NISA if you wish and your provider allows this. However, many savers may prefer to hold separate accounts for cash and stocks and shares investments, and can continue to do so.
What happens to existing ISAs?
- All ISAs became New ISAs on 1st July 2014, including ISAs opened from 6th April 2014 to 30th June 2014
What amounts can be transferred from a Stocks and Shares NISA to Cash NISA?
Different rules will apply depending upon when you paid the relevant amounts into your Stocks and Shares ISA. If you wish to transfer savings relating to any current year’s payments to your account: (i.e. amounts you have paid in since 6th April 2016), you must transfer these as a whole.
However, any savings relating to payments to your account in earlier years (amounts you have paid in before 6th April 2016) can be transferred to a Cash NISA in whole or in part. Not all ISA providers will allow part transfers, so you should check this with the provider of your Stocks and Shares NISA when deciding whether to transfer.
Can I transfer savings back again?
Yes – since 1st July 2014 you can transfer between Cash and Stocks and Shares NISAs as many times as you wish.
New ISA key benefits
- Shelter cash or investments of up to £15,240 from tax (£30,480 for a couple)
- ISA limits set to increase annually
- You pay no capital gains tax on the returns from your ISA
- No further income tax to pay
- You don’t have to mention ISAs on your tax return
- You have complete freedom about how you use the money in your ISA