ISA guide for savers in the new tax year
The new tax year has officially begun, and this means that all British people over the age of 16 are entitled to place up to £5,940 of their money into a Cash ISA, where they can enjoy tax free returns on their savings.
If you have never used an ISA before, then it can be argued that there has never been a better time to start than now, with rates rising to as high as 2.75% and new regulations enabling savers to place as much as £15,000 in from July this year. So what are you waiting for? Read our guide now and find out about the recent changes that have been made to the ISA system, as well as learning what measures you can take as a saver to ensure you acquire optimal returns on your usage of savings accounts this year.
What are ISAs and how do they work?
For all who are unfamiliar with what ISAs are, they are essentially a form of savings account that people can utilise in order to obtain tax free returns from their interest. Just like their conventional saving account counterparts, there are easy-access and fixed term accounts to choose from, though both stocks and shares can be placed into an ISA, and the capital gains made from them can be shielded away from the taxman.
The maximum allowance for an ISA at present is £11,880 of which £5,940 can be used to earn interest on cash savings, and the other half can be used to earn tax free earnings from stocks and shares. Alternatively, you can use the entire allowance to place stocks and shares, though you cannot do the same with cash, yet.
From July 1st this year, new ISAs will be made available that will come with a substantially higher £15,000 allowance for savers to enjoy. Moreover, the entire allowance can be comprised of cash savings, meaning that you stand to receive a lot more from your capital gains that you would have previously.
If you have already opened an ISA, or are apprehensive about opening one now due to fears that you will miss out on the benefits of the new ISAs, then there is no need to worry as you can still top up your existing allowance when it turns July 1st and it will count toward your overall 2014/2015 one. And for all of you who are considering waiting till July due to the notion that substantially more competitive ISA offerings will be released then, the truth is that this will likely not be the case. This is because providers will unlikely feel compelled to improve their deals outside of the current ISA season as they are getting ample financing from the government and do not require added financial backing from savers money.
Essentially, if you desire to save your money, then using an ISA will typically grant you a higher return, simply because you are not subjected to the tiered taxation that standard accounts have levied on them. So for example, if you acquired £200 interest in an ISA, all of it would be yours, but depending on your wage, you would have to pay 20% or 40% or 45% on that £200 with a normal savings account.
Remember, that by using an ISA, you ensure that the cash in there will remain tax free for the duration it remains in there. So ensuring that you max the allowance out each year will have long lasting effects on your saving balance in say, 10 years time, with official estimates already identifying that someone who had utilised the ISA system to the limit since its introduction could have higher than £85,000 worth of untaxed savings available at their disposal at present.
What about the new high interest hybrid current accounts?
In the past few weeks, a number of current account providers have unveiled a series of offerings that function as both a savings and current account, with savers standing to earn as much as 5% interest on their money by acquiring the product. Whilst ISAs should be utilised by everyone as they simply grant users the ability to shield some of their money away from the taxman, their rates in recent times have been relatively low, and this is why the new deals are so attractive.
It is important to remember however, that despite the higher rates on these accounts, that nevertheless you will have to pay tax on the earnings from them, so you will have to compare the post-tax gains against the interest you would receive from an ISA in order to determine whether it is worthwhile acquiring one. The long term nature of ISAs also makes them a superior option to the current accounts, as they enable the cash to be untaxed on any gains so long as it remains in there.
Maximise your gains
In order to make the best of both worlds and maximise your gains, a dual approach to saving is advised. Essentially, if you capitalise on the new high interest current account offerings available at present, and then move the money out of the account in March next and place it into an ISA, you stand to optimise your returns from your savings this year. To elaborate:
Firstly, look for one of the new current accountís that are on the market which offer high interest rates on balances. Make sure that the account you choose gives you a higher return post-tax than if you had utilised an ISA. In order to achieve this, it will be necessary to compare all the current account deals on offer at present, though Nationwideís Flex Direct account is a highly attractive deal that gives 5% interest on balances as high as £2,500.
Next, you should use this account up until March next year, the month before the 2015/2016 tax year is set to begin. In this month, you should begin looking around for the ISA on offer that pays users the highest rate, and then take the money out of your current account and max out your cash ISA allowance.
By doing this, you will acquire the higher gains available from the limited term current account deals on the market at present, and can then simultaneously acquire the tax free returns from rapidly improving ISAs on the eve of the new year tax next April.
Accounts to look out for
There are a number of attractive accounts on offer at present, and more are expected this summer, so keep an eye out. Here are just some that have caught our attention at present: ISAs:
Nationwide Regular Saver ISA - Users get paid 2.5% interest AER and top monthly limit of £1,250. Cash can be accessed when you like, and is applicable for top up from July 1st.
Santander Direct ISA Saver - Users get paid 1.6% interest AER, and the minimum deposit is £500. You can transfer ISAs first previous years.
Nationwide FlexDirect - Users receive 5% interest on balances up to £2,500, which then falls to 1% after the first 12 months. Post tax this converts to 4% for basic taxpayers and 3% for 40p taxpayers.
Santander 123 Current Account - Users receive 3% interest on balances up to £20,000. This converts to 2.4% for basic taxpayers and 1.8% for 40p taxpayers.
TSB Classic Plus Account - Users receive 5% interest AER on balances up to £2,000 but can have two accounts to earn interest on. Post tax this converts to 4% for basic taxpayers and 3% for 40p taxpayers.