At the start of the new financial year in April the ISA allowance for all those under the age of 50 will change. These changes took place in October for those who were born before 5th April 1960. Recent research conducted by the National Savings and Investments group discovered that only 15% of individuals understand the upcoming changes to their ISAs, so here is a quick guide to the new rules.
ISAs are tax-free wrappers that protect the money invested in it from being taxed so all the interest that the account earns remains with you. Each year you can invest a certain amount into an ISA, and this is known as the ISA allowance.
As of the 5th April 2010 this ISA allowance will change for everyone under the age of 50. The allowance will rise by ?3,000 from ?7,200 to ?10,200.
The ISA allowance is split into two parts, the cash ISA and the stocks and shares ISA. Each individual may invest up to, but no more than, half of their ISA allowance in cash.
The stocks and shares element can make up any amount of the ISA allowance that isn't taken up by cash, it does not have to be half and half so if you invest ?200 in cash, you can currently invest ?7,000 in stocks and shares. A stocks and shares ISA can be taken directly with a supplier, or you can choose to wrap some of your own stocks and shares portfolio in an ISA wrapping.
Each person in the country is allowed one cash ISA account and one stocks and shares ISA account, and it's possible to switch between providers in order to get better deals.
One of the most important details is that the ISA allowance is calculated by the amount of money you invest in your ISA and not the balance of your account. If, for example, you invest ?1,500 in cash, you will be allowed to invest another ?2,100 under current regulations. If you then were to take out ?500, you would still only be allowed to invest another ?2,100. When the new financial year arrives you have a new allowance, but any leftover from the previous year doesn't count. If, for example, you invest ?3,000 of this years ?3,600 cash allowance, next year you will only be able to invest ?5,100, not the spare ?600 from this years allowance.
At present, interest rates are not particularly attractive, but that doesn't mean that you shouldn't invest any savings that you do have in an ISA. When interest rates recover, the more money that you have invested in your ISA the more interest you will earn tax-free. If you haven't yet reached the limit of this year's ISA allowance, it's a good idea to put in as much money as you can before the financial year ends. If you have an ISA you should always try to make the most of it.
Lon Sonoski has a
stocks and shares ISA with Legal and General.
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