5 Minute Guide to the New ISA for savers and investors
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 are changing 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. 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 come into effect from the 1st July 2014
What are the key changes?
The key changes that will be brought in include:
- New ISA allowance – The ISA allowance rises to £15,000
- Improved flexibility – Savers will be able to divide 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 – The pre-NISA regulations allowed transfers from a cash ISA to a stocks and shares ISA, but not the other way round. From 1st July 2014 savers will be 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 will rise to £4,000
How much can I hold in a New ISA?
- As of 1st July 2014 your ISA allowance will increase from £11,880 to £15,000 for the 2014/2015 tax year.
- For a couple that means they can put aside £30,000 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 will be able to 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 become New ISAs on 1st July, including ISAs opened from 6th April 2014 to 30th June 2014
- If you have put the maximum £11,880 into an ISA between 6th April to 30th June you can save another £3,120 into either cash or stocks and shares in the current tax year.
Please note if you have paid into a Cash or Stocks and Shares ISA since 6 April 2014, you will not be able to open a further New ISA of the same type before 6 April 2015. You may however make additional payments – up to the £15,000 NISA subscription limit. Please check with your existing provider.
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 after 6 April 2014), 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 5 April 2014) 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 – after 1 July 2014 you can transfer between Cash and Stocks and Shares NISAs as many times as you wish.
Will this change only apply to the 2014/2015 tax year or is it permanent?
The new rules will apply for amounts paid to a New ISA in 2014/2015 tax year and in future tax years. Each autumn, the Chancellor usually announces the new ISA limits for the next tax year.
New ISA key benefits
- Shelter cash or investments of up to £15,000 from tax (£30,000 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
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.