ISA allowance

BREAKING: the ISA limit is being raised to £15,000 per year from July 2014 and all of this can be cash. But for now, the details below are correct for the tax year ending April 5th 2014.

It is getting close to that time of year when savers can start adding more funds to their ISAs but with allowances changing on a yearly basis, just how much can you invest this time around?

Well there is some good news and some bad news. The good news is that this year sees a 2.1% rise in the allowance and from April 6th 2013 to April 5th 2014 you can invest a total of £11,520 with a maximum of £5,760 in the form of cash savings. This is up from £11,280 (£5,640 in cash) for the current tax year.

The bad news is that this rise is less than in previous years. This is partly because the increase in allowances is now linked to the lower consumer price index (CPI) measure of inflation rather than the retail price index (RPI).

Remember, if you haven’t yet used up all of your ISA allowance for this tax year, you have until April 5th 2014 to do so.

Regular Savers

It is not compulsory to fill an ISA up with your entire allowance in one fell swoop; you can invest any amount at any time you wish as long as you do not exceed the limit. There are a number of regular saver ISAs on the market that allow you to set a certain amount aside each month by way of standing order from your current account.

Stock and Shares

While there is a maximum amount that you can put into a cash ISA, if you wish to use your entire allowance to receive tax free returns on share capital then you are welcome to do so.

With shares in an ISA, you will not pay any capital gains tax on profits made although this would only ever be the case if your gains were higher than a certain amount – this stands at £10,600 for the year 2012/13 but should rise in line with CPI for the new tax year. If your gains are less than this, an ISA will not save you any tax.

If you are a higher rate taxpayer and you receive dividend income then an ISA will give you tax relief on this. Standard rate taxpayers do not pay income tax on dividends so again no tax would be saved in this respect.

Making Withdrawals

You ISA allowance is a fixed amount each financial year and it applies to the total sum deposited into the account and NOT on your rolling balance.

What this means is that if you put the full £5,760 cash into an ISA and then withdraw £2,000 for instance, you cannot then put that £2,000 back in at a later date. You have already deposited the maximum amount so you can not deposit any more regardless of your withdrawals.

*Some ISA accounts will only allow you to make a certain amount of withdrawals per year and some will reduce your rate of interest should you do so. Be sure to read the small print of any account to ensure it fits your personal requirements.

Transferring Old ISAs

One thing your ISA allowance does not cover is any transfers from other ISA accounts you might have.

So if you have £5,640 invested from the current tax year and you wish to transfer it to another financial institution to get a better rate of interest, you can do this AND invest a further £5,760 in the new tax year.

Junior ISAs

There are ISAs specifically for some children under the age of 18 (those not eligible for a child trust fund) called junior ISAs and the allowance for these is rising from £3,600 in the current tax year to £3,720 in 2013/14. This amount can be spread however you like between cash and stock and shares.

A junior ISA isn’t suitable for everybody and deciding whether or not it is for you is beyond the scope of this article but we highly recommend reading our comprehensive guide to junior ISAs which covers everything you need to know.

Use It Or Lose It

In all of the above situations, if you do not use your whole ISA allowance in a tax year then you effectively lose it. You cannot go back and top up last year’s ISA once the 5th April has passed.

So try to use up every last bit of your cash ISA allowance each year and if you invest in stocks and shares then use it wherever possible until your allowance limit is reached. There is not point in leaving good money on the table if you can avoid doing so.