How to Use an ISA Allowance to Save Tax Free
Choosing the Best ISAs (Individual Savings Accounts) Boosts Savings
Nov 10, 2009
Every UK adult has the right to take advantage of saving tax free in ISA (Individual Savings Accounts). Each individual is given an allowance that they can use to save in either cash or stocks and shares ISAs (or both). Those with savings or those who wish to start saving often find this is a useful product. Any returns given here are tax free. How do ISAs work?
What is the ISA Allowance?
As of the 2009/10 tax year an individual is currently allowed to save up to £7,200 in ISAs annually. Following changes in this year's budget, those aged over 50 (by April 2010) have been given an extended allowance of £10,200. This higher sum will be rolled out to all ISA holders from April 2010.
Under current rules up to half of the allowance can be placed in a cash ISA. If an individual uses (or plans to use) their full cash allowance then any portion of the other half can be put into a stock and shares product if they wish.
Or, if the individual prefers they can put more or all of their annual allowance into a stocks and shares product rather than holding a cash account. Basically, they cannot use more than half in a cash product but all of the allowance or any remaining part of it can go into an investment option.
How do ISAs work?
An ISA account works to the UK tax year so the allowance is available on an annual basis. But, each year's limit can only be used once and, if it isn't all used up (and it doesn't have to be), then it disappears (i.e. it doesn't carry over to be added to the following year's allowance). Withdrawals from an account cannot be replaced if their replacement would exceed the annual limit.
So, for example, if an individual currently has the £3,600 cash allowance then they can:
- Deposit up to this amount (in a lump sum, regular or ad hoc payments) in their account.
- Withdraw whenever/whatever they like as their account allows.
- Not pay in more over the course of the year than their allowance, even if they make withdrawals, or they'll risk losing their tax free status. So, for example, if an account holder pays in £3,000 and withdraws £1,000 then they can't put this back in. They can only add the £600 that would take them up to their allowed limit.
An individual can only hold one account of each type per year but they can transfer accounts to other providers if they wish if they find better offers.
Why Take Out ISAs?
There are a few benefits to taking out ISAs. These include:
- 100% tax free savings.
- The ability to access their cash at all times.
For many this is their first port of call for savings and investments. The fact that everyone can have this tax free allowance means that it makes sense to use it up to maximise returns. Most other savings and investment accounts will see tax payers pay for the interest they are given.
Those with more money to invest and who are likely to use up their ISA allowance quickly each year may also want to look at other tax free savings options such as pensions, National Savings accounts and Premium Bonds.
Source: Interactive Investor
 |
 |
 |
 |
 |
