Every ISA question answered

Whether you are new to ISAs, or you’ve been building up your balance for years, there may still be aspects of these tax-free savings accounts that you are not 100% clear on.

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That’s why we’ve got the answers to every ISA-related question under the sun.

1. What is an ISA?

An individual savings account (ISA) is not an investment in its own right, but a tax-efficient wrapper in which you can shelter savings and investment funds. Half of the allowance can be held in cash and half or all of it can be held in stocks and shares, and you do not have to pay a penny in income tax or capital gains tax on your returns.

2. Do I have to be a UK taxpayer to open one?

To open an ISA you simply need to be a UK resident. If you’re a non-taxpayer, it’s still worth retaining your allowance in case your tax situation changes.

3. How old do I have to be?

To save into a cash ISA you need to be at least 16 and to invest in a stocks and shares ISA you need to be at least 18. 

4. How much can I pay in?

At present, you can shelter a total of £11,280 from the taxman, of which half (£5,640) can be held in cash and the same amount in stocks and shares; alternatively, the whole £11,280 can be held in stocks and shares.

Your decision will depend on how much spare money you have, and your attitude to risk. The overall allowance will rise to £11,520 from the start of the new tax year on April 6, 2013 and again, up to half can be put into a cash ISA. 

5. When is the deadline for the current tax year?

The current tax year ends on April 5, 2013. If you still haven’t used your ISA allowance this year, act quickly, as if you don’t use it, you lose it. Your allowance cannot be carried over into the new tax year.

6. How much can I put in next tax year?

From the start of the new tax year on April 6, 2013, you can squirrel away a total of £11,520 into an ISA. The cash element will go up from £5,640 to £5,760. 

7. Can I have more than one ISA open at any one time?

There is no limit placed on the number of ISAs you can hold. This means you can open a new cash ISA and a new stocks and shares ISA each tax year and keep your old ones open.
But crucially, you can only pay into one cash ISA and one investment ISA each tax year.

8. How can I find the best ISA deal?

The best way to ensure your money is working as hard as it possibly can be is by shopping around and comparing rates using a price comparison service such as MoneySupermarket.

9. Do ISAs come with bonus rates?

Some variable rate cash ISA deals do come with bonuses and in the current low-interest environment it may be worth taking advantage of these. However, the bonuses will drop away after a certain period (usually a year), so it’s worth noting down this date so you remember to move your savings to a better account at that time.

10. Are fixed or variable rates better?

One of the big decisions to make when choosing a cash ISA is whether to opt for a fixed or variable account. Generally speaking, better rates are on offer if you are willing to lock your money away for a fixed period. However, you then risk missing out on higher-paying accounts when rates do start to rise.

11. How do ISA rates compare with other kinds of savings accounts?

ISAs compare favourably with other types of savings accounts as returns are tax-free – so it’s always worth making use of your ISA allowance first. On standard savings accounts, you have to pay tax on the little interest you earn which will quickly eat into your returns. Generally speaking, the best variable rate cash ISAs pay more than standard savings accounts, with even better rates on offer on accounts where you are required to give notice to get access to your money.

12. How long do ISA rates tend to be available?

In the current low-interest environment, cash ISAs with competitive rates tend to get snapped up very quickly, and providers often withdraw accounts in a matter of weeks to avoid being left at the top of the best buy tables. The key is to act fast when a good deal becomes available.

13. How do I move money between ISAs?

If you want to transfer money languishing in a low-paying cash ISA to a better-paying ISA you must not withdraw the funds yourself and close the account because if you do, the tax benefits will be lost.

Instead, you have to follow the rules and request the banks do the work for you; simply give your new provider instructions to transfer the funds from your current provider. Usually when you apply for a cash ISA you will be given a form to fill in with your existing account details.

Providers must now complete transfers within 15 working days and you should not lose out on any interest during the transfer.

Note, however, that not all ISAs will accept transfers in – so check this. Also check if there is a penalty for transferring from your existing cash ISA provider, and whether you have to give any notice

If you’re looking to transfer a stocks and shares ISA, you will need to transfer the entire account if it contains current-year subscriptions. Hand in your notice to your ISA provider, and check if any charges are involved.

The transfer must also include a transfer history form, available from HMRC.Be aware that while you are allowed to transfer from a cash Isa into a stocks and shares Isa, it’s not possible to do a transfer the other way around.

14. Can I transfer my ISA balance and top it up in the same tax year?

If you want to transfer your ISA balance, you first need to check that transfers are permitted. If the answer is yes and you do move an old ISA balance, bear in mind you are not using any of the current year’s allowance.

This means you can continue to use your annual allowance as usual for this year. Even if you had previously paid some of this year's allowance into your old ISA, providing you have not used up the full allowance, you can still pay in the remainder after you've transferred your balance to a new ISA. 

15. Can I ‘transfer in’ more than one balance to a new ISA?

If you have several old ISAs languishing on low rates, it is possible to transfer several balances into a new ISA. However, you must tell your new provider that you want to transfer money in from a number of existing ISAs.

When transferring large sums into one account, you need to be careful not to go over the £85,000 Financial Services Compensation Scheme limit, as your money will not be protected if you do.

16. Does a new ISA rate apply to my ENTIRE ISA balance?

Having made a transfer, the new ISA rate applies to the whole balance.

17. What happens if I need the money in my ISA back?

You can withdraw the money held in an ISA whenever you need to, unless you’ve opted for a fixed-rate account. But bear in mind that once you withdraw money from an ISA you lose its tax-free benefits, and will not be able to top up the account again in that same tax year.

18. What happens if I pay more than my allowance into my ISA?

Generally speaking, your ISA provider will monitor the amount you’re paying in and not allow you to go past the ISA limit. If you do somehow manage to exceed this, the money over the limit will not qualify for tax-free status. You should get in touch with your bank or building society to get a refund.

HMRC also has measures in place to monitor your annual ISA subscriptions, so may contact you. If in doubt, contact HMRC directly to explain the problem.

19. When and how do I know what next year’s ISA allowance will be?

The Chancellor usually announces the new ISA limits in the Budget in March or in the Autumn Statement in December.

20. What happens if I took an ISA out today, invested my 2012/13 allowance, then wanted to put the 2013/14 allowance in after April 5? Could I pay the funds into the same ISA?

It depends on the account. If you go for a fixed rate cash ISA you can usually only make one deposit at the time the account is opened – so if you put your 2012/13 allowance in a fixed account, you wouldn’t be able to add your 2013/14 allowance to it as well.

However, if you go for an easy access Cash ISA, you could invest your 2012/13 allowance and then add next year’s allowance to the same account as these accounts allow deposits (and withdrawals) at any time

21. Do tax-free ISA allowances go up every year?

ISA allowances go up every year and at present are increased in line with inflation; this is worked out using the consumer prices index (CPI) measure of inflation.

22. How much would I have if I’d invested my full ISA allowance every year?

If you’d invested the full allowance into your cash ISA each year since these products launched in 1999-2000, you would now have a total of £47,280 plus interest.

Please note: Any rates or deals mentioned in this article were available at the time of writing.

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