From 1st July 2014, ISAs are changing; cash ISAs and stocks & shares ISAs will remain as separate accounts, but they will fall under an over-arcing single named account called “NISA” or New ISA.
If you have already subscribed to a cash ISA or stocks & shares ISA since 6 April 2014, you need to check with your provider to see if you can top-up. Some providers may not allow you to do so, in which case it can be worth considering changing providers to one that will allow you to take advantage of the additional allowance of a NISA.
Benefits Of The NISA
- A NISA blurs the lines between the two separate accounts, enabling you to have greater choice and freedom to control your money between the two.
- The current allowance for tax-free savings within your NISA is £15,000 per annum; an increase of £3,120 from the previous cap for 2014/2015 of £5,940 for cash ISAs and £5,940 for stocks & shares ISAs.
- You can either make regular payments up to your total £15,000 allowance throughout the tax year, or make a one-off lump sum payment.
- You can now choose how to split your total NISA allowance. The rule of only being able to save a maximum of half your ISA limit in a cash ISA has been lifted.
- Under the new regulations, you will be able to transfer your stocks & shares ISAs to a cash ISA – even from previous years. So, if you decide that you don’t like how the stock market is performing for you, but your money has previously been tied up in stocks & shares, you will now be able to transform some or all of your existing stocks & shares ISAs into a cash ISA.
- You will be able to transfer your money between your cash ISA and stocks & shares ISA are many times as you like (although it may be worth checking with your provider if there is a financial penalty for doing so).
- Any interest on cash held in a stocks & shares ISA is now tax-free.
What Isn’t Changing?
- You will still only be allowed to subscribe to one cash ISA and one stocks & shares ISA in a tax year.
- You can still transfer your cash ISA to a stocks & shares ISA.
- You can still open ISAs with different providers.
- You are still allowed to hold additional, historical ISAs that you are no longer paying into.
What About Junior ISAs?
The overall structure and subscription process for a junior ISA will remain the same, but the amount you can save will increase to £4,000 in 2014/2015.
What About Withdrawals?
Of course, you can withdraw from your cash or stocks & shares ISAs as before. However, if you then decide to replace any withdrawn funds, this will count as a new payment towards your total NISA allowance so it is important to think carefully before making any withdrawals.
For example: you put £15,000 into an ISA during a tax year, but later in that same tax year you decide that you need to withdraw £4,000 to perform emergency home improvements. You cannot then put another £4,000 into your ISA until the tax year is over and a new one begins. Similarly, if you deposit £8,000 into an ISA but then decide to withdraw £2,000, you can only put another £7,000 into the ISA throughout the rest of the tax year. In other words, the £15,000 limit is based on total deposits and not the amount you have in an ISA at the end of a tax year.
Important note: HMRC have advised that you do NOT withdraw funds from your existing stocks & shares ISA in order to top up your cash ISA as these funds will be treated as a ‘fresh payment’ and may take you over your total NISA allowance. You should arrange a transfer through your stocks & shares ISA provider.
When Is A Cash ISA Best For Me?
It goes without saying that a cash ISA provides you with tax-free interest earned on your savings, whereas a normal savings account opens you up to taxable interest. However, it can be extremely useful to compare the exact rates of interest involved in order to determine whether or not you’re getting the best deal.
For example: if a non-NISA savings account is offering you an interest rate of say 3.0%, but a cash ISA offers 2.0%, you may think that the standard saving account offers the better rate. However, you have to factor in tax deductions for non-NISA accounts.
This means that at the basic tax rate, your interest attracts 20% tax, or 3.0% – 20% = 2.4%. In this instance, the savings account proves to be the better product.
At the higher tax rate, your interest attracts 40% tax, or 3.0% – 40% = 1.8%. In this instance, the cash ISA account works out best.
It can be worth shopping around to find the best interest rates and you may find that current accounts with linked savings accounts offer some of the most competitive incentive rates to sign up. You shouldn’t become complacent though, as most of these rates are variable or only introductory so you should be prepared to move your money if the interest rate stops being such a good deal.
With the government making greater inroads into helping savers make the most of their money, as well as providing more freedom to decide how to save, there has never been a better time to look at NISAs.
Use Your New ISA Allowance Regardless Of Low Rates
The sad state of affairs that our economy has been in over the last few years means that the Bank of England is having to keep the base rate of interest at a record low and despite recent signs of growth, this is unlikely to change a great deal over the next few years (a gradual increase in rates has been suggested as the most likely scenario by governor Mark Carney).
While low interest rates may be good for homeowners and businesses, for those of us who rely on our savings to provide an income, it is a disaster which has forced many to tighten their belts. It’s not good news for those who want to build up a nest egg either as interest on accounts accrues far slower than it used to.
While this may be the case, there is still a very good argument for taking full advantage of your yearly NISA allowance.
Save Now, Transfer Later
While cash ISA rates may not be very high now, the beauty of the system means that you can build up savings year by year and transfer them around to get the highest interest rate.
Therefore it makes sense for you to save as much as you can in your NISA each and every year. Because the interest on cash ISAs is free of tax, if you manage to save a significant amount now, then when rates improve in the future (which they almost certainly will in the long term) you will be in the best position possible to benefit from these higher rates.
But I Can Get Better Rates Now!
While it is true that some traditional savings accounts currently offer higher rates of interest than cash ISAs, if you choose to put your money into a regular account instead of an NISA and the financial tax year ends, you cannot then utilise your NISA allowance for that tax year – it is gone forever.
One thing that you can do in this circumstance is to leave your money in the savings account until the very last moment and then withdraw it and fill up your ISA as much as possible in the few days before the tax year ends on April 5th. This way you get the benefit of the higher interest rates for the majority of the year AND the ongoing tax free income that an ISA can provide.
So you don’t have to lose out in the short term to get the best in the long term.
Clearing Up The Jargon
You’ll see that this article sometimes uses NISA while talking about ISAs at other times. Here is an explanation as to why:
NISA is the term we use here to describe the umbrella name under which cash and stocks & shares ISAs sit. It is a term that has been made up by the government but since it is an abbreviation of “new individual savings account”, we don’t think it makes sense to talk about a ‘cash NISA’.
The consumer is used to, and comfortable using, the term ISA and we write for the consumer so while this continues to be the case, we will continue to use ISA to talk about actual accounts while using NISA when talking about total limits.
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