New ISA rules explained

Correct as of July 1, 2014

The Chancellor, George Osborne announced significant changes to tax-free individual savings accounts (ISAs) in his March Budget, which took effect on July 1, 2014.

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New ISAs (NISAs) are the new, improved version of an ISA and come with a much higher tax-free savings allowance of £15,000. NISAs also eliminate any restrictions between cash and stocks and shares so, as a saver, you are now able transfer all of your previous ISA balances from stocks and shares into cash, as well as the other round. And if you like, you can hold the lot in cash.

Here we explain exactly how NISAs work, and what the changes could mean for you.

What is a NISA?

As it says on the tin, a New ISA (individual savings account) is the same as an ISA - just new, and better.

A NISA is essentially a tax-free wrapper with a given annual limit. Before July 1, this allowance could be split between a stocks and shares ISA and a cash ISA, or the full allowance could be invested in a stocks and shares ISA.

Just like regular savings accounts, you can choose from a fixed rate NISA, which pays a set rate of interest for a certain period of time with restrictions on withdrawals, or a variable rate NISA where the rate of interest can go up or down, but you retain access to your savings.

The only major difference between cash ISAs/NISAs and other cash savings accounts is that returns paid are tax-free. With non-ISA/NISA account, interest is paid after 20% tax has been deducted(unless you are a non-taxpayer and apply for it to be paid gross). Then higher-rate tax payers must account for additional tax through their self-assessment tax return.

How much can I save in a NISA?

During the first three months of this tax year (2014/15), between April 6 and June 30, the annual ISA allowance was £5,940 in cash and up to the same amount in stocks and shares. Or you could have invested the full £11,880 allowance in stocks and shares. 

Since July 1 however, the traditional distinction between stocks and shares and cash ISAs no longer exists.

Now there's just one single New ISA (NISA), into which you can invest a maximum of £15,000 each tax year - all in cash if you want. Alternatively you can still choose to have a separate cash NISA and stocks and shares NISA (which can even be held by different providers), so long as you don't bust your overall annual allowance.  As mentioned, the major difference is that you’ll be able to keep the full amount in cash, which is great for savers who want to avoid the risks of the stock market.

What else will be different?

Before July 1, it was only possible to transfer from a cash ISA to a stocks and shares ISA. It was NOT possible to make a transfer from a stocks and shares ISA into a cash ISA.

Now, however, that's changed so you’ll be able to move from stocks and shares to cash if you want – and that includes ISA balances held from previous years. This will be really useful if you are looking to reduce the risk profile of any investments. For example, if you are approaching retirement or will soon need to pay for university costs for your child.

What happens now?

If you have already used your full ISA allowance for the 2014/15 tax year, you will now be able to top up your NISA account up to £15,000. Some providers/accounts may impose restrictions though, which we explain further down this article.

Are age requirements changing?

Because you can now switch stocks and shares into cash as well as the other way round, you may think it follows that the minimum age requirements to hold either kind of NISA will also be made consistent. However the age restrictions have not changed. You will still need to be 18 to hold a stocks and shares NISA, but only 16 to hold a cash NISA.

What about my existing ISAs?

Just as before, you will still be able to transfer your previous ISA balances to new deals if you want to. For example, if you have a cash account that's no longer earning a decent rate of interest - perhaps the bonus has expired or you have come to the end of a fixed rate - you can move your money into a different account paying higher returns.

You should still NEVER withdraw your NISA/ISA savings in order to transfer them though, else you will lose the tax-free benefits. Instead, you will need to ask your new NISA provider for a transfer form, and it will arrange to switch over the money on your behalf.

You will still only be able to move your NISA/ISA cash to an account which accepts transfers in – not all of them do.

What if I have a fixed rate ISA that I want to top up from July?

Fixed rate savings accounts - including tax-free ones - do not generally allow top-up funds to be paid in. That said, the switch from ISA to NISA, along with its boosted allowance this July was somewhat unprecendented. So, if you paid all or part of your new £5,940 cash allowance into fixed rate cash ISA from April 6, 2014, whether you can top up to £15,000 will depend on the account and the provider.

Some, such as Halifax, Nationwide and Santander have all confirmed you WILL be able to top up your fixed rate NISA from July, for example. But be warned as providers are imposing different deadlines on this. Halifax for example, has said it will allow savers to pay in extra funds up to 180 days after opening their account, where as Nationwide wants the extra cash by July 31 and Santander, by August 31.

Will there be any other changes?

Yes - and they are all good. For example, savers will soon be able to hold an even wider range of investments within a NISA. In his Budget, the Chancellor also announced that peer-to-peer lending could be held within a tax-free NISA wrapper for the first time. However, we still don't have concrete timings on when this will take effect.

(Peer-to-peer websites, such as Zopa and RateSetter, lend your money directly to borrowers, which could be individuals, small businesses or even property investors. The idea is that you achieve higher returns than you might from a bank or building society savings account. However, while peer-to-peer is now regulated by the Financial Conduct Authority (FCA), your money will still not be protected by the Financial Services Compensation Scheme (FSCS) which covers the first £85,000 should the provider go bust.)

And the restrictions on some of the investments you can currently hold in NISAs have already been lifted. For example, corporate bonds will no longer have to have at least five years left to run if you want to hold them in a NISA.

You can also now hold cash in a stocks and shares NISA without ultimately having to put this money into qualifying investments. Prior to July 1, any cash held in a stocks and shares ISA was subject to a flat rate tax charge of 20% it was not invested within a 'reasonable' time limit. That charge and time restriction has also now removed.

Tax-free savings for children

The Junior ISA limit and the limit on Child Trust Funds (CTFs) also rose from July 1 to £4,000. From April 2015, you will be able to transfer a CTF into an Junior ISA.

Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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