If you are aged 50 or over, from 6 October your Individual Savings Account (ISA) allowance increased by a further £3,000 to £10,200; £1,500 of this increase can be saved in a cash ISA.
Everyone else will be entitled to this higher contribution allowance from 6 April next year. The increase was announced during the Chancellor’s last Budget and is only the second time limits have been raised since ISAs were launched in 1999.
The earlier you invest in the tax year, the better you can make sure that you are using your ISA allowance to its full advantage and the longer your money is outside the reach of the taxman.
ISAs are virtually tax-free savings, which means that you do not have to declare any income from them, and you can use an ISA to save cash or invest in stocks and shares.
ISAs can be used to:
save cash and get tax-free interest
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
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, once you have transferred your cash ISA to a stocks and shares ISA it is not possible to transfer it back into cash.
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 ‘saving 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 Gain Tax (CGT) savings
If you make gains of more than £10,100 (2009/10) from the sale of shares and certain other assets in the current tax year, you would normally have to pay CGT. However, you do not have to pay any CGT on gains made from an ISA.
The value of 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.