The end of the 2009/10 tax year is rapidly approaching and now is the perfect time to consider your Individual Savings Account (ISA) options. These tax-efficient wrappers are a popular and simple way to save, as you don’t pay any personal income tax or capital gains tax on any profit you may make.
ISAs were introduced by this government in April 1999 to replace Personal Equity Plans (PEPs) and Tax Exempt Special Savings Accounts (TESSAs) as a tax-efficient way to encourage people to save over the medium- to long-term.
What can you save or invest in an ISA?
ISAs can be used to:
save cash and the interest will be tax-free
invest in shares or funds – any capital growth will be tax-free and there is no further tax to pay on any dividends you receive
Savers born on or before 5 April 1960 (that is, aged 50 or over during the current tax year) can save up to £10,200. The full £10,200 can be invested in a stocks and shares ISA with one provider or up to £5,100 can be saved in a cash ISA with one provider, with the remainder being saved in a stocks and shares ISA with either the same provider or another.
Savers who were born after 5 April 1960 can save up to £7,200. The full £7,200 can be invested in a stocks and shares ISA with one provider or up to £3,600 can be saved in a cash ISA with one provider, with the remainder being saved in a stocks and shares ISA with either the same or another provider. From 6 April this year, the ISA limit will increase to £10,200, up to £5,100 of which can be saved in cash for all ISA investors.
According to the age 50 rule, someone who is currently under age 50 but who will reach age 50 between 6 October 2009 and 5 April 2010 will only be able to pay in more than £7,200 during the 2009/10 tax year (up to a maximum of £10,200) once they have attained their 50th birthday. So, for example, if an investor will not attain age 50 until 1 March 2010, they will not be able to pay in more than £7,200 until 1 March 2010.
Transferring money from cash ISAs to stocks and shares ISAs
If you have money saved from a previous tax year, you can transfer some or all of the money from a cash ISA to a stocks and shares ISA without this affecting your annual ISA investment allowance. However, please remember that once you have transferred your cash ISA to a stocks and shares ISA it is not possible to transfer it back into cash.
How much tax will you save?
Interest and dividends from savings:
if you pay tax at the basic rate, outside an ISA you would usually pay 20 per cent tax (2009/10) on your savings interest
if you pay tax at the higher rate, outside an ISA you would usually pay tax at 40 per cent on your savings interest
if you pay the ‘savings rate’ of tax for savings, outside an ISA you would pay tax at 10 per cent on your savings interest
if you’re a basic rate taxpayer inside or outside an ISA you pay tax at 10 per cent on dividend income. This is taken as a ‘tax credit’ before you receive the dividend and cannot be refunded for ISA investments
if you’re a higher rate taxpayer you would normally pay tax on dividend income at 32.5 per cent. In an ISA you won’t get back the 10 per cent dividend tax credit element of this, but you will save by not having to pay any additional tax
Capital Gains Tax (CGT) savings
If you make gains of more than £10,100 from the sale of shares and certain other assets in the tax year 2009/10, you would normally have to pay CGT. However, you do not have to pay any CGT on gains from an ISA.
The value of your investment can go down as well as up and you may not get back the full amount invested.