The new ISA rules and how they work
In March 2014, George Osbourne announced a major overhaul of the hugely popular individual savings account, commonly known as an ISA. A tax free investment instrument, the ISA has helped millions to maximize their wealth, so it’s little surprise that many were worried about how these changes would impact them.
With further alterations to ISAs announced in July 2015, the ground shifted again, and many remain unclear as to what this means for their savings. To help clarify, here are a few answers to some of the questions you might have:
What does the new ISA limit mean for you?
Changes to the ISA limit are nothing new, but in recent years, increases have been more significant than usual. On 1 July 2014, the total rose by a marked degree, from £11,880 to £15,000. On 6 April 2015, we saw a further rise to £15,240 and by 6 April 2017 we can expect it to soar again, to £20,000, almost double the 2014 figure.
It is not only the numbers that have changed. Traditionally, only half of your annual allowance could be placed into a cash ISA, with the remainder having to be put into a stocks and shares alternative. Now, this limitation no longer exists and you can deposit the full amount into either option, or else split it in any way you desire between the two. The result? Increased flexibility and a greater appeal to many savers.
What are the differences between a cash ISA and a stocks and shares option?
As we explained above, two primary ISA options exist: cash and stocks and shares.
The former is easy to understand. A cash ISA is nothing more than a tax-free savings account. This means that any money you earn via interest is exempt from tax deductions and the profits are yours alone to enjoy.
A stocks and shares ISA is a little different. Although it offers tax benefits, it is not entirely tax free. You can use your money to invest in shares, bonds and investment funds, and will not have to pay income tax or capital gains on these, but you will have to pay dividend tax rates on amounts exceeding £5,000. These are set at 7.5 per cent for basic rate taxpayers, 32.5 per cent for their higher rate counterparts, and 38.1 per cent for additional rate taxpayers.
How do the new ‘flexible ISA’ rules work?
Another change that many are curious about is the ‘flexible ISA’ rules that have been introduced. Whereas cash removed from an ISA would, in the past, automatically lose its tax-free advantages, irrespective of the fact that it counted towards your allowance, money that is taken out now can simply be replaced later in the year. This means that provided you redeposit it during the same tax term, you will not be disadvantaged, a major boon to many.