Sky Money, Tuesday March 11, 2008
It's a new tax year - and you can build a significant nest-egg if you start saving now. We show you how to make the most of your tax-free Isa allowance
Isas (Individual Savings Accounts) allow you to save significant sums of money without having to pay any tax on the interest you earn. With less than one month left before the end of the current tax year, millions of savers will be rushing to take advantage of their tax-free savings allowance.
If you don't want to share your interest dividends with the Treasury, it pays to know how much you could gain from opening an Isa. We clarify the rules and explain the benefits.
What are Isas?
Isa stands for Individual Savings Account. The various types of Isa accounts allow you to hold a range of different investments - including cash, stocks and shares, or a combination of both. All returns on these investments are tax-free: gains on any other kind of savings account are liable to income tax or capital gains tax.
How much can I invest?
You can invest up to £7,000 in a single tax year, although this is set to rise to £7,200 from April 6 2008. Your annual tax-free allowance can't be rolled over into the following tax year - which means once it's gone, it's gone for good. So there's not long left to make use of this year's tax-free savings allowance.
How many Isas can I have?
There are two types of Isa: mini and maxi. You can either open two 'mini'-Isas or one 'maxi'-Isa per tax year.
If you want to invest any cash savings, you should look first to a mini cash ISA. You can invest up to £3,000 a year in a cash Isa (rising to £3,600 from April 6 2008), the remaining £4,000 of your annual allowance (£3,600 from April 6 2008) can be invested in a mini stocks and shares Isa.
If you want to invest in shares as well as cash, then you'll need a 'maxi'-ISA. Maxi-isas are designed for people who want to use most or all of their annual allowance and are popular with those wanting to invest in non-cash assets such as unit trusts, open ended investment companies, investment trusts, exchange traded funds, shares or bonds. You can hold up to £3,000 in cash within a maxi Isa but the interest rates tend not to be the best.
Find the best home for your savings
Are all cash Isas the same?
No. Cash Isas are like any other savings account and there are a number of different types - easy access, fixed rate and notice accounts.
Historically, notice and fixed rate accounts have tended to pay higher rates of interest than easy access deals, but that's not necessarily always the case. At the moment for example, the Barclays cash Isa offers a top rate of 6.5% (but only for 12 months), likewise Abbey's Direct Isa, which pays 6.25%.
There is one fundamental difference between Isas and standard savings accounts: tax is not levied on the interest you receive from a cash Isa. Normally, higher-rate taxpayers pay 40% on any savings interest, while those in the basic rate band pay tax at 20%.
There are some strings attached to certain deals you should be aware of. Some accounts include introductory bonuses, so the interest rate drops after a while - there is no need to avoid such accounts, but you need to make a note to move your money elsewhere once the bonus period ends otherwise you could be left earning an uncompetitive rate of interest.
Can I transfer money I have invested in previous tax years?
Yes, you can transfer money without losing the tax-free status - but you do need to be careful. Make sure your bank treats it as a transfer and not an account closure - otherwise you'll lose the tax-free status on those funds.
Do I have to pay my money in, in one lump sum?
No. Some accounts have minimum investments, often £100 or £1,000 but many rates are available on deposits of as little as £1 or £10. You can therefore pay money in whenever you have cash to spare and use your Isa allowance over the course of the tax year.
What about withdrawals?
Most easy access accounts, as their name suggests, allow you to withdraw funds whenever you want. However, you will lose the tax-free status on anything you take out, so it is worth keeping your money invested in Isas for as long as possible and use any other savings first.
Find the best home for your savings
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