Hurry – if you want to avoid paying tax on your savings

ISAs offer savers lots of benefits, but there are rules attached, says James Daley

With only seven weeks left until the end of the tax year, time is running out to make use of your annual ISA (Individual Savings Account) allowance. Not sure what all the fuss is about? Read on.

What are ISAs?

ISAs were introduced by the Labour government nine years ago, replacing PEPs and Tessas. They allow every UK taxpayer to save a certain amount of money each year, without having to ever pay any tax on the interest, dividends or capital gains.

Because each tax year runs from April to April, February and March tend be the busiest time of year for ISA sales – as investors rush to take advantage of their annual allowances before the start of the new tax year.

You can invest your annual ISA allowance into either a cash savings account, or into stocks and shares. However, the limits vary, depending on which mix you decide to go for.

How much can I invest in a cash ISA?

If you only want to invest your ISA allowance into a cash savings account, you need to take out a "mini cash ISA". In the current tax year, you can put a maximum of £3,000 into these types of accounts, rising to £3,600 in the 2008/09 tax year.

The best no-notice account on the market at the moment is offered by Alliance & Leicester, paying interest of 6.25 per cent. To find other top deals, visit www.moneyfacts.co.uk, or check out our Best Buy tables on page 19.

What if I want to invest in stocks and shares as well?

If you want to invest some of your savings in the stock market, you can put up to £7,000 a year into a maxi stocks and shares ISA, rising to £7,200 a year from 6 April. If you want to invest in a mix of cash and stocks & shares, you can use up to £3,000 (£3,600 from 6 April) of your maxi ISA allowance for cash investments.

Can I invest my ISA in anything apart from cash and shares?

Yes. Most unit trusts, investment trusts and Oeics (open-ended investment companies) qualify for inclusion within a stocks and shares ISA.

There are several thousand of these funds to choose from in the UK, investing in everything from bonds to commercial property to commodities. For more details on non-equity investments for your ISA, see our article on pages 8 & 9.

How much tax will I save by using an ISA?

In a regular cash savings account - or a current account - any interest accrued will be taxed at 20 per cent (or 40 per cent if you're a higher-rate taxpayer). Therefore, if your account advertises a gross interest rate of 5 per cent, you would only receive 4 per cent after tax, or just 3 per cent if you're a higher rate taxpayer. Within an ISA, however, you receive the full gross rate.

On a £3,000 ISA, that's only a saving of £30 or £60 a year. However, someone who has used their full cash ISA allowance each year would now be saving several hundred pounds in tax every tax year.

Anna Bowes, of AWD Chase de Vere, the independent financial advisers, says using your cash ISA allowance should be a no-brainer. "If you're a UK taxpayer and you use your cash ISA allowance, you're getting an immediate cash benefit by not paying tax on your savings," she says. "When it comes to stocks and shares ISAs, however, there may not be any immediate benefit unless you are a higher-rate taxpayer."

Every UK taxpayer has a capital gains tax allowance of £9,200 a year – so unless your invest-ments grow by more than this in a single tax year, you wouldn't be liable to pay tax, even if they're not held within an ISA.

However, if you're earning an income from your ISA investments – by investing in bond funds, for example – you will have to pay tax, unless you hold the funds within an ISA.

While basic-rate taxpayers do not have to pay tax on share dividends, higher-rate taxpayers are taxed at 22.5 per cent. Within an ISA, however, they can avoid this.

For those who take full advantage of their ISA allowance each year, the tax-breaks can eventually amount to thousands of pounds a year.

Can I switch money from a cash ISA into a stocks and shares ISA?

As of 6 April, you will be able to transfer savings from cash ISAs into stocks and shares ISAs. However, Bowes points out that you cannot make a transfer back the other way, so you need to be sure of your decision before you go ahead.

How do I open an ISA?

If you're looking to put all your money into a single savings account or fund, the provider will usually be able to hand over all the paperwork you need to ensure your money ends up within an ISA wrapper.

For those who want to invest in a number of different funds, or who want to invest directly in individual shares, it's necessary to use a broker, such as TD Waterhouse (www.tdwaterhouse.co.uk) or The Share Centre (www.share.com), or a fund supermarket, such as Fidelity's FundsNetwork (www.fundsnetwork.co.uk).

If you need advice on where to put your money, you can find a financial adviser in your area, by visiting www.unbiased.co.uk

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
Young Winstone: His ‘tough-guy’ image is a misconception
people
Sport
Adnan Januzaj and Gareth Bale
footballManchester United set to loan out Januzaj to make room for Bale - if a move for the Welshman firms up
Arts and Entertainment
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer
filmIdris Elba responds to James Bond rumours on Twitter
Arts and Entertainment
Ellie Levenson’s The Election book demystifies politics for children
bookNew children's book primes the next generation for politics
PROMOTED VIDEO
News
Outspoken: Alexander Fury, John Rentoul, Ellen E Jones and Katy Guest
newsFrom the Scottish referendum to the Ice Bucket Challenge, our writers voice their opinions
Arts and Entertainment
Lena Headey as Cersei Lannister in Game of Thrones
film
News
i100
Sport
Yaya Sanogo, Mats Hummels, Troy Deeney and Adnan Januzaj
footballMost Premier League sides are after a striker, but here's a full run down of the ins and outs that could happen over the next month
News
Nigel Farage celebrates with a pint after early local election results in the Hoy and Helmet pub in South Benfleet in Essex
peopleHe has shaped British politics 'for good or ill'
Sport
Tim Sherwood raises his hand after the 1-0 victory over Stoke
footballFormer Tottenham boss leads list of candidates to replace Neil Warnock
Voices
Strictly Come Dancing was watched by 6.9m viewers
voicesIt has been hard to form generally accepted cultural standards since the middle of the 19th century – and the disintegration is only going to accelerate, says DJ Taylor
Arts and Entertainment
Roffey says: 'All of us carry shame and taboo around about our sexuality. But I was determined not to let shame stop me writing my memoir.'
books
News
Danielle George is both science professor and presenter
people
News
i100
News
Caplan says of Jacobs: 'She is a very collaborative director, and gives actors a lot of freedom. She makes things happen.'
people
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

    Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

    Selby Jennings: Quantitative Research | Equity | New York

    Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

    Selby Jennings: SVP Model Validation

    Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

    Selby Jennings: Oil Operations

    Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

    Day In a Page

    War with Isis: The West needs more than a White Knight

    The West needs more than a White Knight

    Despite billions spent on weapons, the US has not been able to counter Isis's gruesome tactics, says Patrick Cockburn
    Return to Helmand: Private Davey Graham recalls the day he was shot by the Taliban

    'The day I was shot by the Taliban'

    Private Davey Graham was shot five times during an ambush in 2007 - it was the first, controversial photograph to show the dangers our soldiers faced in Helmand province
    Revealed: the best and worst airlines for delays

    Revealed: the best and worst airlines for delays

    Many flyers are failing to claim compensation to which they are entitled, a new survey has found
    The stories that defined 2014: From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions

    The stories that defined 2014

    From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions
    Stoke-on-Trent becomes first British city to be classified as 'disaster resilient' by the United Nations

    Disaster looming? Now you know where to head...

    Which British city has become the first to be awarded special 'resilience' status by the UN?
    Finally, a diet that works: Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced

    Finally, a diet that works

    Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced
    Say it with... lyrics: The power of song was never greater, according to our internet searches

    Say it with... lyrics

    The power of song was never greater, according to our internet searches
    Professor Danielle George: On a mission to bring back the art of 'thinkering'

    The joys of 'thinkering'

    Professor Danielle George on why we have to nurture tomorrow's scientists today
    Monique Roffey: The author on father figures, the nation's narcissism and New Year reflections

    Monique Roffey interview

    The author on father figures, the nation's narcissism and New Year reflections
    Introducing my anti-heroes of 2014

    Introducing my anti-heroes of 2014

    Their outrageousness and originality makes the world a bit more interesting, says Ellen E Jones
    DJ Taylor: Good taste? It's all a matter of timing...

    Good taste? It's all a matter of timing...

    It has been hard to form generally accepted cultural standards since the middle of the 19th century – and the disintegration is only going to accelerate, says DJ Taylor
    Olivia Jacobs & Ben Caplan: 'Ben thought the play was called 'Christian Love'. It was 'Christie in Love' - about a necrophiliac serial killer'

    How we met

    Olivia Jacobs and Ben Caplan
    Bill Granger recipes: Our chef's breakfasts will revitalise you in time for the New Year

    Bill Granger's healthy breakfasts

    Our chef's healthy recipes are perfect if you've overindulged during the festive season
    Transfer guide: From Arsenal to West Ham - what does your club need in the January transfer window?

    Who does your club need in the transfer window?

    Most Premier League sides are after a striker, but here's a full run down of the ins and outs that could happen over the next month
    The Last Word: From aliens at FA to yak’s milk in the Tour, here’s to 2015

    Michael Calvin's Last Word

    From aliens at FA to yak’s milk in the Tour, here’s to 2015