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Full NISA Guide Save without paying tax

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Many people think ISAs are complicated. That perception grew in July when ISAs become NISAs (New ISAs) in the biggest change to the accounts since they were launched.

But, even though the rules have changed, the premise stays the same. ISAs or NISAs, they're simply tax-free or tax-efficient accounts for your savings or investments. This guide answers your most common questions about them, including what the changes are. We'll also guide you through how you can save for your kids.

Q. What is an NISA?

A. If you've got any savings, or investments, you should have a New ISA (NISA) - it's as simple as that. The reason? You pay less tax (or no tax in the case of cash savings) and therefore increase your returns. It's a no-brainer! For years, we've used the same analogy to explain ISAs. So why stop just because they've become NISAs? Here come the cakes!

A real life ISA example

What's the difference between an ISA and a NISA?

In many ways, it's just a case of adding an 'n', but there are a few changes to the limits and regulations of how you can save in a NISA:

  • You can now save £15,000 tax-free in a cash NISA.
  • You can choose how to split the £15,000 between stocks & shares and cash NISAs (or not split it at all).
  • You can also now transfer stocks & shares NISAs into cash ISAs.

The changes aren't huge, but it's possible the name changed so the Government can take credit. After all, saying "we gave you NISAs" is far sexier than saying "we boosted the ISA limit".

It's worth noting that any old ISAs you have are now NISAs - so you can transfer them into NISA accounts as and when you please.

Q. How much can you put into a NISA?

A. Each tax year, you get a NISA allowance which sets the maximum that can be saved within the tax-free wrapper from April to April.

The old ISA system used to limit how much you could put into each pot - you'd either get half your allowance in cash and half in shares, or you could choose to put it all in shares.

But from 1 July 2014, the rules were almost completely relaxed. Although you still have a limit to the amount you can save (£15,000 in 2014/15), you now get to choose how you split this between stocks & shares and cash NISAs. You even get to choose whether you want to split it - if not, you can use the whole amount for stocks & shares or the whole amount for cash.

How you can split your NISA allowance:

  • Use the maximum allowance for cash or investing. For the first time, you can put all the £15,000 in a cash NISA. Or, invest the whole lot in an investment NISA.

  • Mix 'n' match. Split the allowance between cash and stocks & shares NISAs. You get to choose!

    If you wanted to, you could invest £1,500 in a cash NISA, and £13,500 in a stocks & shares NISA. Or do it the other way around. The only rule is that, combined, your tax free NISA savings in the 2014/15 tax year don't exceed £15,000.

  • Have it all in one. Some stocks & shares NISA providers may allow you to hold cash tax-free within your stocks & shares NISA. But you're free to open separate accounts, as above, if you prefer.

You must save or invest by 5 April, the end of the tax year, for it to count for that year. Crucially, any unused allowance doesn't roll over - so if you don't use it, you lose it forever. You'll get a new allowance the next tax year, but won't be able to contribute anything to the old ISA.

Any savings or investments which stay within the tax-free NISA wrapper will continue to earn interest and reap the tax benefits until you withdraw the money.

This means it's possible to have substantial amounts invested tax free: £7,000 per year from 1999 to 2008, £7,200 per year until 2010, £10,200 for 2010/11, £10,680 in 2011/12, £11,280 for 2012/13, £11,520 for 2013/14 and £15,000 for 2014/15, plus the gains (interest or investment returns) made in each year.

How do the New ISA rules affect me?

The answer to this depends on what you've already done this year...

I've not opened an ISA of any kind since 6 April 2014

If you've not opened a stocks & shares ISA or a cash ISA since April, then it's business as usual for you. You can open a cash NISA or a stocks & shares NISA (or both) and invest up to £15,000 in them before 5 April 2015.

I've already paid into an ISA since 6 April 2014

Between 6 April and 30 June 2014, you could contribute up to £11,880 into a stocks & shares ISA, or £5,940 into a cash ISA and the rest into a stocks & shares ISA.

If you've paid up to the limits, your existing ISA(s) for this year transform into a NISA. You're then able to pay another £3,120 into your NISA (and this can be any combination of cash and investments that you choose). Obviously, if you’ve only opened a cash ISA before 1 July, then you can pay in a further £9,060 before 5 April 2015.

Check that your provider allows additional deposits. If you've an easy access account, it won't be a problem, but if you've a fixed rate cash ISA, then it's worth checking your provider's terms on further deposits. Some may not allow it, or may have a very short time window for you to make the additional deposit.

If you can't make further deposits to an account, then it's worth either opening a stocks & shares NISA to use the additional £9,060 allowance, or transferring your current year's cash NISA to a provider that does allow additional deposits (you'll need to transfer the whole amount you've paid this year, so watch for any penalties for closing the account early).

Q. What NISA should you pick?

A. There are two types of NISA - one you can use for cash savings and one you can use for investing, though with New ISAs, for the first time, the choice is completely yours about how much you use for cash, and how much for shares.

Cash NISAs explained

Use a standard instant access savings account, and basic rate taxpayers have to give 20% of the interest earned straight to the Government. For higher rate taxpayers, this leaps to 40%, and for additional rate taxpayers, it's 45%.

With a cash NISA, there's NO tax to pay!

Cash NISAs are simply savings accounts where the interest isn't taxed, meaning it's incredibly rare for a normal savings account to pay more interest.

For a cash NISA paying 2% AER to be beaten, a basic-rate taxpayer would need a savings account offering 2.5%, while anyone paying higher-rate tax would need 3.33% - and those accounts currently aren't out there.

Just like normal savings accounts, there are a variety of cash NISAs available, including instant access, regular savers and fixed-rate deals. You don't have to pay to open a cash NISA. For details of the best payers, read Top Cash NISAs - it's updated daily.

Stocks & shares NISAs explained

You can also use your NISA for investing. This type of account is called a stocks & shares NISA, where you can invest in funds (shares or bonds from various companies pooled into one investment), bonds (basically a loan to a company or a government), and shares in individual companies.

Stocks & shares NISAs are typically managed by an online service (often called an online broker or platform), fund management group or fund supermarket.

If you wish to open a stocks & shares NISA, you need to be aware that many of these companies charge a fee for you to open and hold a stocks & shares NISA. Some even charge you if you want to change any of your investments, withdraw your money or move it to another company.

Some stocks & shares NISA providers may allow you to hold some of your allowance as cash within the stocks & shares NISA. But you're free to open separate accounts if you prefer.

For the cheapest way to invest tax efficiently, read the Stocks & Shares NISA guide.

Tax benefits of a stocks & shares NISA:

Placing investments inside an NISA wrapper doesn't mean they're tax-free, but doing it provides three tax advantages:

  • No tax on profits. You don't have to pay any capital gains tax on profits made from share price increases.

    Invest outside an ISA and any profits made above the annual capital gains tax allowance (£11,000 for 2014/15) would be subject to tax at 18% for basic-rate taxpayers and 28% for higher-rate and additional-rate taxpayers. You make a profit when you sell a share for more than you bought it for.

  • No tax on interest earned on bonds. So you get to keep it all.
  • 10% tax cap on income. This means income earned from any shares investments is taxed at 10%. So while basic-rate taxpayers would pay the same outside a NISA, this is a significant saving for higher and additional-rate taxpayers who would otherwise pay higher rates of 32.5% and 37.5% respectively.

Remember, there's ALWAYS a risk involved when investing, as your investments can go down as well as up. The general consensus is that it's a long-term game - you should put money away for a minimum of five years to smooth out any ups and downs.

Q. Should you get a cash or investment NISA?

A. This isn’t about choosing which one is best - that depends purely on your attitude to risk. It's about whether you gain more from putting savings into a cash NISA or using your NISA allowance for investing.

The gain from putting cash into a NISA is simple: you don’t get taxed on the interest. But with investing, whether you actually gain from putting it in a NISA depends on your circumstances.

  • Are you eligible for capital gains tax? Stocks & shares NISAs exempt you from capital gains tax (a tax on profits which you only pay when you sell your investments). Yet you can make £11,000 a year of profits before being hit by this tax, so this protection only helps those who are selling sizeable assets within one tax year – otherwise it's irrelevant.
  • Will you put money into bonds? If you’re investing in bonds, a stocks & shares NISA will shelter the income from tax.
  • Will you get an income? If you receive dividend income, it's taxed at 10% for basic, 32.5% for higher, and a whopping 37.5% for additional-rate taxpayers. Within a stocks & shares NISA the max dividend income tax is 10%, regardless of your tax status. So while it's no different for basic-rate payers, it can represent a significant saving for others.

IN SHORT: Small investors who won’t use their capital gains allowance and invest in shares rather than bonds could gain more using their cash NISAs to the limit. But - if you're a higher rate taxpayer and you'll have dividend income, it's perhaps worth splitting the allowance.

Big investors, especially those putting money in bonds, should max out their stocks & shares NISAs to the £15,000 limit.

Q. Who can open a NISA?

A. You need to be a UK resident aged 16 or over to open a cash NISA, or aged 18 or over to open a stocks & shares NISA. You can't open an account together with someone else, or on behalf of someone else.

There's also a mini version for kids, called a junior ISA, which works in a similar way. One little anomaly is that 16-18 year olds can open a cash NISA and a junior ISA in the same year, meaning they're able to save up to £19,000 a year (in cash) tax-free.

Q. How can you withdraw money?

A. A common mistake is to think a NISA needs to be held for a set length of time in order to reap the tax-free benefits. Luckily, that's wrong. Providing the rules of the individual product allow it (there are loads that do), you can have full, instant access to your money without losing the tax benefits on the rest of your savings within the NISA.

But once the money's withdrawn, it can't be returned. A few examples should help clarify this.

Situation: Mr Rich Devil invests £15,000 in a stocks & shares NISA at the beginning of the tax year.

Options: He may sell the whole investment, or part of it, at any time without losing the tax benefits. But he can't put any more money into his NISA that year.

Situation: Ms Irma Indecisive invests £2,000 in a cash NISA at the start of the tax year.

Options: She may save up to a further £13,000 in the cash NISA, or £13,000 in a stocks & shares NISA (or a mix of the two) before the end of the tax year.

Situation: Irma then decides she needs to withdraw £1,000 of this cash.

Options: There's no problem withdrawing the money; while the £1,000 was in the NISA its interest wasn't taxed. However, the fact she has withdrawn the cash doesn't increase her allowance at all - she can still only put £13,000 more in the cash NISA, or the same in the stocks & shares NISA.

It's also worth noting that if you have an NISA that pays interest annually, and you decide to close it before the interest is due to be paid, you will still get the accrued interest paid on the account (less any penalties for closure/withdrawal - check your T&Cs).

Q. Can you switch provider once you're set up?

A. There's nothing stopping you switching provider for cash or stocks & shares NISAs or vice versa. In fact, to make sure you continually get a top rate, this will be essential, particularly for cash NISAs. Yet it isn't like switching a standard savings account, as transferring a NISA is a technical process.

As long as you abide by our golden NISA transfer rule, it should go smoothly:

Never, ever, ever, ever withdraw the money yourself!
You'll immediately lose all the tax benefits.

Instead, speak to the new provider and fill out a transfer form. Your new provider should then sort it all out, including contacting your current provider, and moving the money over for you.

If you transfer a stocks & shares NISA, it may be necessary to pay another initial set-up charge. Some stocks & shares NISA providers (and some fixed cash NISA providers) also charge you for withdrawing your money or leaving them.

That's the key thing to remember. But when transferring NISAs, what you can do depends on which type of (N)ISA you want to transfer.

    Transfer rules:

  • Current year's cash NISA. You can move ALL of this to another cash NISA, or into a stocks & shares NISA. You can't split it between more than one provider.

  • Current year's stocks & shares NISA. You can move ALL of this to another stocks & shares NISA or cash NISA, but you can't split it between more than one stocks & shares NISA.

  • Past years' cash (N)ISAs. You can move ALL of this to another cash NISA or into a stocks & shares NISA, or you can SPLIT it between more than one cash NISA or stocks & shares NISA.

  • Past years' stocks & shares (N)ISAs. You can move ALL of this to another stocks & shares NISA or cash NISA, or SPLIT it between more than one stocks & shares or cash NISA.

Not all NISA providers will accept transfers of previous years' allowances. To see the best ones that will, read the Transferring Cash NISAs guide.

Following a ruling by The Office of Fair Trading, a cash NISA transfer should take no more than 15 business days. stocks & shares NISAs shouldn't take more than 30 days to transfer.

Q. What about Tessas, PEPs and mini ISAs?

A. Personal equity plans (PEPs) and tax-exempt special savings accounts (Tessas) were forerunners to ISAs during the 1980s and '90s. Once ISAs were introduced, there were also mini and maxi ISAs.

All these tax-free savings accounts have now been converted into NISAs.

If you had cash in a mini ISA, this is now just a cash NISA. A mini shares ISA is now just a stocks & shares NISA. And if you had a maxi ISA (a combination of cash and shares) then the shares element will be a stocks & shares NISA, and the cash element a cash NISA.

Tessa and PEP cash will also now be cash NISAs. It's worth checking any old accounts, as it's likely they're all paying rubbish rates of interest. See the Transferring Cash NISAs guide for the current top payers. All these accounts accept any old cash ISA savings.

If you think you had either of these investments, or a standard ISA, but are now not sure what's happened to it, it's possible to track down old accounts and reclaim the funds (plus any interest) inside them. Read the full Reclaim Forgotten Cash guide.

Q. Can you get an ISA for your kids?

A. Yes, you can. There's a version of the NISA for kids called a junior ISA (JISA). Just like the adult version, it allows you to save tax free or tax efficiently on behalf of a child. You can save or invest for your child, or do a bit of both.

    Junior ISAs in a nutshell:

  • You can save up to £4,000 a year into a JISA - this is just over a quarter of the adult NISA allowance.
  • You can divide the annual allowance whichever way you like - so you can put it all in cash or all in stocks & shares (or any mix of the two).
  • Your child can't touch the money until they turn 18 - The account is held in the child’s name but is opened and managed by you. The child can take control at 16, but can't touch the cash until 18 (at which point it's their cash, not yours).
  • Your child can only hold a cash JISA with one provider - and it works the same with a stocks & shares JISA. This means you top up with the same provider each year. If you're unhappy with the provider or you spot a better deal somewhere else, you can always transfer your child's JISA to another company.

JISAs replaced Child Trust Funds when they were scrapped for new savers on 3 January 2011. This means JISAs are only available to children born on or after that date, or children aged under 18 but born before 1 September 2002, when the CTF was introduced, and so never had the chance to contribute to a CTF.

When your child turns 18, the money belongs to them to do with as they like. You might want them to use the money for a house deposit or studying, but they could decide to blow it all on partying - and you wouldn't be able to stop them.

INTERESTING FACT: If your child is 16 or 17, they get two ISA allowances - the Junior ISA allowance PLUS the adult cash NISA allowance of £15,000.

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