With the new tax year due to begin on Thursday 6 April, many savers are rushing to fill their ISA allowances for 2016/17.
Although cash ISA rates have dropped in recent years, they can still form a valuable part of a savings portfolio.
What is an ISA?
Put simply, ISAs are tax-free accounts for your savings or investments.
You can save up to a maximum of £15,240 in 2016/17, and this can be in a cash ISA, a stocks and shares ISA, an innovative finance ISA, a Help to Buy ISA or a mixture of all of them. The allowance is rising to £20,000 for the year 2017/18.
When is the ISA deadline?
You must save or invest by 6 April 2017, the end of the tax year, for it to count for the 2016/17 tax 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 next tax year (£20,000 in 2017/18), but won’t be able to contribute anything to the old ISA
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. For the current tax year savers can put £15,240 in their ISA, and this rises to £20,000 for the 2017-18 tax year. You are not allowed to pay more than this into an ISA each year, and you can also only pay into one account of each type of Isa at a time.
Types of ISAs
There are four main types of ISA – cash ISAs, Help to Buy ISAs, innovative finance ISAs and stocks and shares ISAs.
Typically, dependent upon individual tax brackets, when you use a standard instant access savings account you pay tax on any you save over the £1000 Personal Savings Allowance. Basic-rate taxpayers must give 20% of the interest above the £1,000 personal savings allowance earned straight to the Government and the tax rate increases depending on your earnings.
But with a Cash ISA, the interest is NEVER taxed. Plus, any interest you earn doesn’t count towards your personal savings allowance, so if you’ll earn a lot of interest, you can protect more of it in an ISA.
Who can open an ISA?
You need to be a UK resident aged 16 or over to open a cash ISA or Help to Buy ISA (further restrictions apply), or aged 18 or over to open a stocks & shares ISA or innovative finance ISA. You can’t open an account together with someone else, or on behalf of someone else.