ISA savers 2 minute guide to the Budget
Further to last month’s Budget speech by the Chancellor, George Osborne, we give you a quick round up of the main changes around ISAs and what this will mean for both cash savers and investors.
New tax year, new limits – an even bigger allowance
From July last year, Mr Osborne significantly increased the annual ISA allowance to £15,000, allowing savers to squirrel more money away from the taxman than ever before; and because the allowance now rises in line with inflation, since 6th April 2015, the annual ISA investment limit for 2015/16 has risen by £240 to £15,240. Every UK adult gets their own allowance, so couples can save twice that amount. The limit for the Junior ISA (JISA) has also risen by £80 to £4,080.
Radically more flexible
A significant reform is that savers now have the freedom to withdraw and replace money in the same tax year without it counting towards their annual ISA allowance limit for that year, as long as the repayment is made in the same tax year as the withdrawal. This means ISA are now fully flexible so you can withdraw money without losing your tax benefits, provided you pay it back in by the end of the financial year. In the past, money taken out of an ISA lost its tax free status so any additional payments would count towards your ISA allowance for that tax year.
Junior ISA flexibility
In a change aimed at the younger generation, families who have taken out a child trust fund (CTF) can now convert it into a Junior ISA CTF’s were a tax-free savings wrapper for children born between 1st September 2002 and 2nd January 2011 which were replaced by the Junior ISA. Some CTFs have been unpopular with parents since they have combined disappointing performance with limited investment choice and high charges, although if you are considering transferring to a Junior ISA you will need to check that they are willing to accept the Child Trust Fund.
Passing on an ISA allowance
Further to an announcement made last December, married couples are now free to pass an extra ISA allowance, equal to the value of their ISA savings on death, to their surviving spouse. This means that couples can now pass the ISA tax breaks to each other however, passing the ISA tax status from parent’s to children is still not permitted. When the surviving partner dies, they will continue to fall inside the family estate for inheritance tax purposes.
“Help to Buy” ISA
A new “Help to Buy” ISA scheme was also announced, aimed at helping first-time buyers get onto the property ladder. Under the scheme, for every £200 a first-time buyer saves, the Government will top up the deposit with £50 up to a maximum of £15,000 in total. So, if a first-time buyer saves £12,000, the Government will add a £3,000 ‘bonus’ to the pot. Savers will have access to this money and will be able to withdraw funds from the ISA account if they need them for another purpose, but the bonus will only be made available for those using the money for a home purchase. The Help to Buy ISA will only be available on houses worth £250,000 or less, or £450,000 or less in London.
And remember the additional changes in place since last year:
- The ban on transfers from Stocks & Shares ISAs to Cash ISAs has been removed, thereby allowing full two-way transferability between deposits and investments and vice versa.
- The rule which prevents more than 50% of the total limit being placed in a Cash ISA has been scrapped and so the entire £15,000 NISA contribution limit can go into cash deposits, or any combination of cash and stocks and shares.
The Chancellor also confirmed tax breaks for non-ISA savings, via the introduction of a new “personal savings allowance” which will reward savers by not taxing the first £1,000 of savings income for basic rate savers, and the first £500 for higher rate taxpayers. Additional-rate taxpayers will not benefit. Mr. Osborne said that this reform would abolish the tax on savings for 17 million people.
Fair Investment view
Commenting on the Budget, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited said: “The addition of the £1,000 savings allowance has largely removed the benefit of increased flexibility for Cash ISAs and with savings rates as they are, many savers may now consider the use of a Cash ISA unnecessary. But investors and those looking to achieve the potential for higher returns than cash has been able to offer in recent years, are the real winners from this year’s Budget. The latest ISA reforms have left investment ISAs more generous, flexible and tax-efficient and a couple can now save up to £30,480 knowing that any income or capital gains will not be subject to tax in the future. Used in the right way, this could build up substantial sums in a relatively short period of time.”
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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 plan. If you are at all unsure of the suitability of a particular product, both in respect of its objectives and its risk profile, you should seek independent financial advice. Tax treatment of ISAs depends on your individual circumstances and is based on current law which may be subject to change in the future. Always remember to check whether any charges apply before transferring an ISA.