If you have not already talked to us about using your 2009/10 Individual Savings Account (ISA) allowance, time is running out. Any unused ISA allowance from this current tax year cannot be rolled over to the next tax year and will be lost forever.
An ISA is a tax-efficient wrapper in which you can hold investments such as cash, shares and stock market funds to avoid capital gains tax and to reduce income tax.
ISAs can be used to save cash and the interest will be tax-free. If you 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.
Your ISA questions answered
Q: Since the ISA contribution limit changes, how much can I now invest?
A: If you were born on or before 5 April 1960 (that is, aged 50 or over during the current tax year) you 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.
If you were born after 5 April 1960 you 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.
Q: Can I invest the full £10,200 in a cash ISA?
A: No. Although ISA limits have been extended, there are still separate limits for cash ISAs and stocks and shares ISAs. The maximum amount you can save in a cash ISA if you are over 50 is £5,100. If you are under 50 the current limit remains at £3,600. However, from 6 April 2010 this will increase to £5,100 for everyone.
Q: Can I save in a cash ISA and also invest in a stocks and shares ISA at the same time?
A: The limits may have changed but the principle behind ISAs remains the same. From 5 October last year, if you were saving the maximum amount allowable in a cash ISA, at the same time you could also invest the rest of your allowance in a separate stocks and shares ISA – up to the permitted limits.
So if you are currently aged 50 or over and have saved £5,100 in your cash ISA, you could also invest a further £5,100 in a stocks and shares ISA within this current tax year. If you are under the age of 50 you can save £3,600 in your cash ISA and a further £3,600 in a stocks and share ISA in the current tax year.
Q: I am not 50 until March this year. When can I take advantage of these increased limits?
A: As long as your 50th birthday falls within this current tax year, that is, before 5 April 2010, you will be able to take advantage of these new allowances that became effective from 6 October last year.
Q: I am over 50 and have already taken out an ISA this year. Will I be able to increase my ISA?
A: In the vast majority of cases you should be able to pay more into your ISA, up to the new limits. If you already have £3,600 saved in your cash ISA, you should be able to increase this by a further £1,500.
Alternatively, if you don’t already have a stocks and shares ISA, you could invest a further £5,100 before 5 April this year. Or you could invest a total of £6,600 into a stocks and shares ISA if you don’t want to increase your existing cash ISA. This would mean you have fully used the maximum £10,200 allowance limit for your two different ISAs.
If you have already invested the full £7,200 in a stocks and shares ISA you will be able to put a further £3,000 into this account.
Q: Can I transfer money from my cash ISA to a stocks and shares ISA?
A: Yes, if you have money saved from a previous tax year, you could transfer some or all of the money from your 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.
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.