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Everyone who's aged 16 and over can put up to Ј15,240 each tax year in a cash ISA - a savings account where you don’t pay tax on the interest.
Cash ISAs need-to-knows
The cash ISA is not dead
You've probably heard about all the innovations to savings, the biggest of which being the personal savings allowance, which will mean that - from April 2016 - basic-rate taxpayers will be able to earn Ј1,000 in savings interest before paying any tax, and higher-rate payers Ј500.
For most people that will be more than enough to ensure they don't pay any tax on their savings. Which, naturally, leads to the question: 'why do I need a cash ISA if I won't pay tax anyway?'
The answer is that there are distinct advantages to saving in an ISA even if your normal savings are also tax free. Read Martin's full thoughts on why the cash ISA isn't dead. or click the question below for a quick summary.
Why should I still save in an ISA if I won’t pay any tax on interest?Even though the majority won’t pay tax on savings, there’s still plenty of reasons to get a cash ISA:
- Rates on easy-access cash ISAs tend to be higher than those on normal easy-access savings.
- Fixed-rate ISAs have to allow you access to your cash, whereas fixed-rate savings don’t.
- This Ј1,000 allowance (for basic-rate taxpayers) seems generous now, when you’d have to have more than Ј70,000 in easy-access savings to exceed the limit. But if savings rates were to go back up, at 5% AER you’d only need Ј20,000 in savings to take you over the limit. Keeping the savings in an ISA wrapper would mean they’re protected in perpetuity.
- You may have a small savings pot now, but in the future, you could have much more. Protect it in an ISA now, and it stays protected.
- Higher-rate taxpayers get a lowered Ј500 limit, so if you pay 40% income tax, save in an ISA first, then use other savings accounts.
- It’s the only place additional-rate taxpayers can save tax free, as they’re not given a savings allowance.
- You can pass on ISA cash to your spouse when you die, and it retains its tax-free wrapper - effectively they can add your ISAs to their own.
We don’t think this is the death knell for ISAs. ISAs retain the advantage that they will always be tax free. So, you might look now and think that the interest you get is paltry, but it may not always be the case. Plan now, so you’re protected in future.
However, let’s put a couple of caveats on that. ISAs won’t be the right decision all the time, and there are two main exceptions: if ISA rates are much lower than savings rates, then the extra tax protection may not be worth it. Or, if you’ve significant capital gains from stocks or shares, then you may be better using your whole ISA allowance for that (putting it into a stocks & shares ISA), and keeping cash savings in non-ISA accounts.
Other top ISA guides.
ISA Transfer: If you're looking to transfer old cash ISAs.
Full ISA: For everything you need to know about ISAs.
Help to Buy ISA: Get up to Ј3,000 bonus if you're a first-time buyer.
You can save up to Ј15,240 this year in a cash ISA
You've probably heard of cash ISAs, they've now been around for more than 16 years. They were radically overhauled in 2014, with the amount you're able to save tax-free rising from just under Ј6,000 to a massive Ј15,000.But, as the amount rises each year, you're now able to save Ј15,240 in an ISA, meaning you won't pay any tax on the interest you get.
Cash ISAs are NOT complicated
Everyone in the UK over 16 has a Ј15,240 cash ISA allowance. The allowance can be used to max out your cash ISA or stocks & shares ISA
- how you split the money is entirely up to you. Plus, from 1 December, first-time buyers will be able to choose a Help to Buy ISA. giving them a bonus of up to Ј3,000 if they're saving towards a house.
The slate's wiped clean at the beginning of every tax year on 6 April, so even if you opened up one just before the tax year ended on 5 April, you can do it all over again now.
There are easy-access and fixed options, just like normal savings. It's that simple. But for some reason many over-complicate them.
Don't be scared. Ideally, we wish we could hypnotise people so when they read "cash ISA", they actually see:
It's a savings account you don't pay tax on.
Know this and it all becomes clearer. Some people don't have a cash ISA because they believe they have to lock their money away. But it's just a savings account - you don't need to lock cash away if you choose an easy-access account.
Still not sure? It's time for an analogy
For years now - whether on TV, radio or in his book - Martin's used the same analogy to explain ISAs. If it ain't broke, don't fix it, so here come the cakes.
What happens to the allowance if I haven't used it by the end of the tax year?
Each tax year (6 April until the next 5 April), everyone aged 16 or over gets a new cash ISA allowance. But if you don't use it, you lose it.
Once that year's closed, you can't put another penny in that specific cash ISA allowance. So if you put aside nothing in the 2014/15 year, when the maximum was Ј15,000, that's it - it's gone. Or if you put Ј2,000 in during 2014/15, the year is closed, you can't now top it up.
If you do deposit the cash in time, you can keep it in there, tax-free, for as long as you like. Then, as soon as the new tax year starts on 6 April, you can deposit a whole new year's allowance.
Can I make withdrawals?
Providing you've picked an easy-access ISA, you can withdraw the money whenever you want, just like a normal savings account. But remember, once the money's withdrawn, it can't be returned.
An example should help. Say you save Ј10,000. That leaves Ј5,240 left to put in for the current 2015/16 tax year. Then two months later, still in the same tax year, you take out Ј10,000. You can still ONLY put Ј5,240 back in.
However, from autumn 2015, if you make withdrawals from an ISA, you’ll be able to replace the cash taken out, provided it’s within the same tax year. Read the flexible ISA rules to see how this will work.
How many ISAs can you have?
According to HMRC rules, you can only open one cash ISA in each tax year. But you can have several old ones with several different providers.
So if you opened a cash ISA with Barclays two years ago, you don't need to stick with it for this year's cash ISA - you can choose whichever the top payer is.
Loophole to open more than one per tax year: A few providers allow you to open and pay into more than one cash ISA with them in the same tax year under these rules:
- The ISAs must be with the same provider.
- You must stick to the overall cash ISA limit when totting up your combined balance between them.
Can I split between a fixed and easy access ISA?
As we've already explained, you can put Ј15,240 in a cash ISA per tax year. With the bigger allowance introduced five providers now offer a workaround. They've structured themselves so they can allow different versions of their ISA to count as one. So you can open as many of their cash ISAs as you like, as long as you DON'T GO OVER THE TOTAL CASH ISA LIMIT.
The providers that allow this are.Source: www.moneysavingexpert.com