Thursday, March 18, 2010

Guide to Individual Savings Accounts

ISA limits

Each tax year, every UK citizen is entitled to an ISA allowance of at least £7,200 – depending on their age. You can either invest as a lump sum, a series of lump sums or a regular deposit, but ISA providers offer varied terms and conditions so you will need to check with your ISA manager to find out the minimum amounts you can invest.

If you are under the age of 50, you can currently invest up to £7,200 between both cash ISAs and stocks and shares ISAs. However, all those over 50 can benefit from a new limit of £10,200 – made up of up to £5,100 in a cash ISA and the rest into a stocks & shares ISA, or the full allowance into stocks & shares ISAs - which applies during the current tax year. This new limit comes into effect for all other savers in the new tax year (6 April 2010).

In the current tax year, if you are under 50 the maximum that can be invested into a stocks & shares ISA is £7,200. The maximum amount that can invested into a cash ISA is £3,600. This means that you could use your full annual allowance for stocks & shares ISAs, or a combination of the two. For example, £3,600 in a stocks & shares ISA and £3,600 in a cash ISA or £6,200 in a stocks & shares ISA and £1,000 in a cash ISA.

It is possible to transfer money from cash ISAs to stocks & shares ISAs. Any funds moved from an existing cash ISA to a stocks and shares ISA will not affect your annual allowance, but you must not simply withdraw cash and move it across manually, this is something your ISA provider must deal with. This feature does not work the other way round, so you cannot transfer money from a stocks & shares ISA to a cash ISA.

What are the benefits of ISAs?

  • They provide Income Tax and Capital Gains Tax benefits, allowing you to avoid paying anything to the tax man on the returns earned.
  • Your ISA does not need to be declared on your tax return.
  • Your ISA can be built up over time with the full amount providing tax free savings
  • You can transfer your ISA each year to take advantage of the best ISA rates on offer
  • Higher rate taxpayers are exempt from paying the additional 25% tax on dividends earned through equity investments which would normally be required on investments outside an ISA wrapper.
  • Any gains received from an investments sold within an ISA are not subjected to Capital Gains Tax (CGT), but it is important to remember that any losses cannot be offset against gains made elsewhere.

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