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Full ISA Guide

Save without paying tax

Many people think ISAs are complicated. That perception grew in July when ISAs got the biggest overhaul they've had since they were launched.

But, even though the rules have changed, the premise stays the same. ISAs are 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.

What is an ISA?

If you've got any savings, or investments, you should have an ISA - 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. Here come the cakes!

A real life ISA example

How much can you put into an ISA?

Each tax year, you get an ISA 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 (£15,240 from April 2015), you now get to choose how you split this between stocks & shares and cash ISAs. 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 (£15,240 from April 2015) in a cash ISA. Or, invest the whole lot in an investment ISA.

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

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

  • Have it all in one. Some stocks & shares ISA providers may allow you to hold cash tax-free within your stocks & shares ISA. 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 ISA 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 ISA or a stocks & shares ISA (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, you're then able to pay another £3,120 into your ISA (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 ISA to use the additional £9,060 allowance, or transferring your current year's cash ISA 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).

What ISA should you pick?

There are two types of ISA - 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 ISAs 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 ISA, there's NO tax to pay!

Cash ISAs 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 ISA 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 ISAs available, including instant access, regular savers and fixed-rate deals. You don't have to pay to open a cash ISA. For details of the best payers, read Top Cash ISAs - it's updated daily.

Stocks & shares ISAs explained

You can also use your ISA for investing. This type of account is called a stocks & shares ISA, 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 ISAs 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 ISA, you need to be aware that many of these companies charge a fee for you to open and hold a stocks & shares ISA. 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 ISA providers may allow you to hold some of your allowance as cash within the stocks & shares ISA. But you're free to open separate accounts if you prefer.

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

Tax benefits of a stocks & shares ISA:

Placing investments inside an ISA 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 an ISA, 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.

Should you get a cash or investment ISA?

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 ISA or using your ISA allowance for investing.

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

  • Are you eligible for capital gains tax? Stocks & shares ISAs 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 ISA 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 ISA 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 ISAs 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 ISAs to the £15,000 limit.

Who can open an ISA?

You need to be a UK resident aged 16 or over to open a cash ISA, or aged 18 or over to open a stocks & shares ISA. 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 ISA and a junior ISA in the same year, meaning they're able to save up to £19,000 a year (in cash) tax-free.

How can you withdraw money?

A common mistake is to think an ISA 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 ISA.

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 ISA 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 ISA at the start of the tax year.

Options: She may save up to a further £13,000 in the cash ISA, or £13,000 in a stocks & shares ISA (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 ISA 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 ISA.

It's also worth noting that if you have an ISA 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).

Can you switch provider once you're set up?

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

As long as you abide by our golden ISA 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 ISA, it may be necessary to pay another initial set-up charge. Some stocks & shares ISA providers (and some fixed cash ISA providers) also charge you for withdrawing your money or leaving them.

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

Transfer rules:

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

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

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

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

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

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

Can you get an ISA for your kids?

Yes, you can. There's a version of the ISA 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 (£4,080 from April 2015) a year into a JISA - this is just over a quarter of the adult ISA 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 ISA allowance of £15,000.