Don’t miss out on using your tax-efficient allowance

An Individual Savings Account (ISA) is a tax-efficient wrapper. Within an ISA you pay no capital gains tax and no further tax on the income, making it one of the most tax-efficient savings vehicles available.

If you are planning to open or transfer an existing ISA, you have until 5 April, but don’t leave it until this date. If you miss the deadline, you’ll lose your £10,680 allowance for the 2011/12 tax year forever. HM Revenue & Customs says your ISA application must have been received by your ISA provider and it must also have been processed to qualify.

What types of ISAs are there?

There are two main types of ISAs: Cash ISAs and Stocks and Shares ISAs.

Cash ISAs work in the same way as normal savings accounts. You choose if you want a fixed rate account, an easy access (or instant access) account or a regular savings account. The only difference is that you don’t pay income tax on the interest you earn.

With a Stocks and Shares ISA you can invest in individual stocks and shares or investment funds. Any profit you make is not subject to capital gains tax. However, you pay 10 per cent tax on dividend earnings.

Who can save in an ISA?

Anyone who is 16 or over and a UK resident can save money in a tax-efficient Cash ISA but to save in a Stocks and Shares ISA you need to be at least 18.

How much can I invest?

As of April 2011, the ISA limit increased for everyone by £480 to £10,680 per tax year. Of this, the maximum amount you can put into a Cash ISA is £5,340, and then the remainder can be invested into a Stocks and Shares ISA.

Alternatively, you may choose to allocate the entire £10,680 into a Stocks and Shares ISA.

When should I invest?

As long as you have not exceeded the current £10,680 ISA limit you can invest in an ISA at any point during the tax year and, depending on the ISA provider, you can allocate lump sums or monthly contributions that fit around your lifestyle.

Will ISAs always be tax-efficient?

The government has promised to keep ISAs indefinitely. However, the tax treatment of ISAs may change in the future.

Can I transfer my existing ISA money?

You can transfer the money saved in a Cash ISA to a Stocks and Shares ISA, even if it was saved in previous tax years, without affecting your annual ISA allowance.

The value of these investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.