ISAs Explained – Everything You Want To Know About ISAs (Individual Savings Account)
Anyone over 16 can now save £15,240 in a new tax-free cash ISA. While ISA rates have had a justifiably bad press recently, if you know what you’re doing, they still vastly out-pay the best savings accounts. And our aim aim here at MoneyHitman is to ensure you know what you’re doing.
ISAs Explained: The basics
What are Individual Savings Accounts (ISAs)?
For a decade now, whether it’s on TV, radio, in books or on my website, I’ve used the same analogy to explain ISAs. It works, so forgive me if I bring out ‘the cakes’ again. Just imagine you’ve got a couple of cakes: one chocolate (representing cash)and the other strawberry (shares). Now picture the taxman picking up a slice and taking a bite from it. Yet each year, to encourage saving, you’re given a tax- free ISA wrapper, a bit like clingfilm, that you can put around some of the cake. Once inside the clingfilm, the cake hasn’t changed. The chocolate is still I chocolate (cash is 1 still cash) and the M strawberry is still strawberry M (shares are still shares). The only difference is that, inside the ISA, the taxman can’t bite it.
ISAs explained: How do cash ISAs work?
The cash element of an ISA is simply a tax-free savings account, and you can take your money out whenever you want. This year, for the first time, everyone will be allowed to put £5,100 in one – and, crucially, once the money’s in, it stays tax-free year after year. That has a real impact. Normally, basic rate taxpayers hand over 20 per cent of their savings interest to the taxman (higher-rate taxpayers pay 40 per cent), so keeping cash in an ISA boosts your take-home interest by a quarter (two- thirds for higher-rate taxpayers), and this gain compounds each year.
The problem is, many providers gleefully take this gain for themselves, by offering desultory low rates such as 0.1 per cent.
ISAs explained: If I take cash out, do I lose the tax benefit?
You can take money out whenever you want without any tax impact. Of course, once outside an ISA, the cash is no longer tax-free, but you don’t have to give back the tax gain you made while it was in there. But once the money has been withdrawn, it can’t be returned. For example, say you put in £3,500, leaving you able to add £1,600. A couple of months later, you withdraw £2,000. That means you can only put £1,600 back in.
ISAs explained: How many cash ISAs can I have?
As many as you want, but only one for the current tax year’s cash ISA. You get a new ISA allowance each tax year, so even if you have opened an ISA before (unless you did it this week), you’ve still got your full 2015/2016 allowance to use. That means you can open a brand new ISA, and it doesn’t have to be with the same provider you used previously.
ISAs explained: Can I still put money in last year’s ISA?
No. If you don’t use your allocation within the year, you will lose it. If you try to do so, it’ll simply count as opening up this year’s allowance with your old provider.
What if my old ISAs are earning little?
Transfer them. The best-paying cash ISAs that accept transfers are at 2.75 per cent AER . Don’t just take your money out to transfer, as then it’s no longer an ISA. Open the new ISA first and ask for the money to be transferred across. A few ISA providers charge if you transfer out, so check first.
Are cash ISAs safe?
You get £85k per person, financial institution savings’ protection, provided it’s in a UK- regulated account (all those listed here are). The fact that it’s in an ISA will not give extra protection, but provided your combined savings in an institution are under £85k, you will be protected. Check it is UK- regulated, for example, Post Office savings are provided by the Bank of Ireland, so your protection’s from the Irish state.
A guide on ISAs explained brought to you by MoneyHitman.com