Credit Where Credit Is Due

Only several years ago, yuppies thought an ISA was either an energy drink or another iPod accessory. No wonder they could only shrug when asked what they’ll do with that year’s limits on cash isa’s.

The same young adults now know that the ISA – or Individual Savings Account – is the UK’s most popular tax break, benefiting millions British savers and investors. In 2010/2011, there were 15.4 million ISA subscriptions in the UK, collectively worth £54 billion. In that fiscal year, the cash ISA limit was pegged at £5,100.

New and existing ISA holders will be happy to note that for tax year 2012/2013, the ISA limit is increased to £11,280, which means a cash ISA limit of £5,640 for one account.

But the financial gobbledegook can be daunting to new investors. Notwithstanding the great publicity generated by steadily increasing cash ISA limit every year, the financial phenomenon has not yet caught on with some individual investors.

We will give credit where credit is due, so get your yearly credit report.

Cash ISAs and SS ISAs

You can put your money on two types of investment. The first is the cash ISA, which is a savings account that earns interest which the taxman cannot touch, in accordance with that year’s ISA limit The second type is a stocks & shares (SS) ISA, which generates tax-exempt income and gains from bonds, stocks, shares, dividends, and funds.

What is a cash ISA?

Cash ISAs are special savings accounts that earn interest (at market rates), which the government cannot tax. This means interest earnings will go straight to your pocket rather than the HMRC. Rates and policies being equal, a cash ISA is much better that your standard savings account.

How do I open a cash ISA?

You need to be a UK resident aged 16 or over to open a cash ISA. For a stocks & shares ISA, you need to be at least 18. Starting November 2011, a Junior ISA was established, allowing kids to start saving in cash ISAs. Of course, documentation and identification will be required by the bank/ISA manager you choose.

Is there a cash ISA limit?

Government regulation puts a cap on the maximum savings you can put in ISAs. In fiscal year 2011/12 (6 April to 5 April), the cash ISA limit was £5,340 for each individual saver. For the 2012/2013 tax year beginning in April 6, the limit leaps by £300 to £5,640. This is equivalent to £11,280 of tax-free interest-earning savings for a couple.

All credit movement into an ISA count one-way towards the cash ISA limit; you cannot turn back the count if you decide to take out cash in that tax year. For example, say that you opened a £3,500 cash ISA in 2011. You then withdrew £3,000 after several weeks. Should you decide to replenish this ISA before the end of the tax year, you are only allowed to invest a maximum of £1,840 since the initial deposit of £3,500 already counted towards that year’s limit, and this was not affected by the £3,000 withdrawal.

How much do I need to open an ISA?

You can open a cash ISA with just £1. However, some of the top-paying cash ISA providers require a minimum initial deposit of £500 in order for your savings to earn.

Am I required to make a lump sum deposit? Can I make monthly contributions instead?

As in regular savings accounts, you choose whether to put money in your ISA at one single go, or do it in monthly installments. Just remember you cannot go over the cash ISA limit. If you put money more than the cash ISA limit, you should not attempt to correct this yourself. Instead, call the ISA Helpline of the HMRC and explain the problem to them.

Which are the top ISA providers?

The top three easy-access ISAs allow you to take out your cash at any time.
•    Newcastle BS –3.05% AER, with a minimum deposit of £1 and a 0.95% bonus for a year
•    ING Direct –3.00% AER guaranteed for a year
•    Marks & Spencer Money –3.00% for a minimum deposit of £100
Top three fixed-rate ISAs:
•    Governor Money Progressive BS 4 years – 4.05% AER, £100 minimum deposit
•    NatWest 3 years – 3.80% AER, minimum deposit of £1,000
•    NatWest 2 years – 3.50%, £1,000 minimum deposit

Can I transfer my taxable savings to a new cash ISA?

Aside from the tax relief, one of the great things about cash ISAs is that you can put old money in it. If you have an existing savings account, you can transfer cash from this account to a new ISA. So it’s a wise move to consolidate all your cash (without going over the cash ISA limit), which could get you 10 times as much interest. Remember, you only have until April 5 to make the move! You can read more on the ISA guide and our surety bond review.