Your ISA questions answered

We're always being urged to make the most of our annual ISA allowance before the end of the tax year on 5 April, yet many of us still aren't clear how ISAs work.

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In this article, we answer all your ISA-related questions to clear up anything you might not be sure about...

1) What exactly is an ISA?

An individual savings account (ISA) is basically a tax-free wrapper in which you can shelter your savings and investment funds.

You can either invest your whole annual allowance each tax year in cash or in stocks and shares, or you can split it and put some in cash and the remainder in stocks and shares.

Since April 2016, you can also invest your allowance (part or whole) in peer-to-peer loans - known as an Innovative Finance ISA.

Any interest or returns you make will be free of income tax or capital gains tax, so you don't have to hand over a penny to the taxman - or even declare it on your tax return.

2) Is an ISA the best savings vehicle for a large deposit?

If you are a taxpayer then in the past the answer has always been yes, although it depends on exactly how much you have to invest. The maximum amount you can invest in ISAs in the current tax year (2018/19) is £20,000.

However, since the introduction of the personal savings allowance in April 2016, basic rate taxpayers can earn £1,000 in savings interest a year in any savings account tax-free, while higher rate taxpayers can earn £500.

As a result, ISAs are no longer quite so attractive. But it is still worth saving in one as any interest you earn from cash ISAs won't count towards this new personal savings allowance. Find out more about the personal savings allowance in our article.

3) If I don't use this year's allowance, can I carry it over to next year?

No. If you don’t manage to use your ISA allowance in any tax year, you won’t be able to carry it over. The end of the tax year is always on 5 April, so you have until this date each year to make the most of your allowance.

4) How much can I invest in an ISA next tax year? 

Next tax year, which starts on 6 April, 2019, the maximum ISA allowance will stay at £20,000. You can invest the full allowance in a cash ISA, or in stocks and shares, or a combination of both.

5) Can I move existing shares into an ISA?

No. You won't be able to transfer existing holdings directly into an ISA, although there are a few exceptions.

You can, for example, transfer shares that have been bought though a savings-related share option scheme, an approved employee profit-sharing scheme, or an employee share ownership plan into an ISA.

However, if you have shares bought outside one of these schemes, you'll have to sell them, put the money into your ISA and buy back the shares. This process is known as 'Bed and ISA'.

6) Can I open an ISA for my children?

Yes you can. Children have their own Junior ISA allowance and parents or guardians can use this to invest on their behalf.

Junior ISAs work in a similar way to normal ISAs in so far as you can either invest in cash or stocks and shares, or a combination of the two.

Your child won't be able to access any money invested for them until they reach the age of 18. At this point they can withdraw their money if they want to, and spend it on whatever they want.

The maximum amount you can invest in a Junior ISA for the 2018/19 tax year is £4,260 per child.

7) Can I withdraw my ISA savings using an ATM?

Cash ISAs don’t come with a debit card, as they are a savings rather than a current account. However, you can usually move ISA money (provided you have invested in an easy access ISA) over to your current account easily enough, especially if you use internet banking. You can then withdraw your funds using a cash machine.

New rules which came in in April 2016 mean that if you have used your maximum ISA allowance and then make a withdrawal, you can top up the account again in the same tax year. Previously, this was not permitted.

8) What happens to my ISA if I go abroad?

You can keep your ISA and will continue to receive tax relief on your savings and investments, but you won't be able to make any more contributions into the account.

The only exception to this is if you are Crown employee working overseas, or if you are the spouse or civil partner of a Crown employee working overseas.

If you move back to the UK at any point, you can then start putting money in again.

9) What if I've paid too much into my ISA?

If you've accidentally exceeded the maximum amount you can pay into an ISA in any tax year, you won't be entitled to any tax relief on these excess payments. Don't worry about putting your mistake right yourself - HMRC should get in touch with you after the end of the tax year to let you know what you need to do.

10) Can I have more than one ISA?

Yes. You can only open and pay into one cash ISA and one stocks and shares ISA in any one tax year, but you can keep these and open new accounts the following tax year if you want to.

11) Where can I find the best ISA deals?

Always shop around and compare different accounts, to make sure you find the most competitive rates possible. You can use MoneySuperMarket's cash ISA channel to see some of the top accounts currently available by clicking on 'see all cash ISA accounts'.

12) Can I move my ISA money into a different ISA account?

Yes. Plenty of cash ISAs accept transfers, but it’s important not to close down your existing account to transfer the money across, otherwise you'll lose the tax-free benefits.

Instead, ask your new provider for an ISA transfer form and your new and old ISA providers will arrange for your money to be moved across. The transfer process should take no longer than 15 working days.

You can move from a cash account to stocks and shares, or from a stocks and shares ISA to a cash account.

13) Is it best to go for a cash ISA which includes a bonus in the rate, or one without?

Cash ISAs which include a short-term bonus usually offer the most competitive returns, albeit temporarily. If you do go for an ISA with a bonus, make a note of when the bonus disappears and transfer your money to an alternative account then.

If you don't want the hassle of endlessly changing accounts, you might be better off going for an account with no bonus. Bear in mind though that if it is a variable rate ISA then it could still fall over time, so you may still need to transfer your money if the rate drops.

14) Can I earn more from a fixed rate ISA?

As a general rule, fixed rate ISAs pay higher returns than variable accounts, in return for you agreeing to tie up your money for the fixed rate period.

However, be wary about locking up your cash for too long, as when interest rates rise, you could find yourself stuck in an account which is no longer competitive.

15) Which is better, a pension or an ISA?

Pensions and ISAs each have their pros and cons, so experts often suggest trying to invest in both if possible.

The big advantage of a pension is that you get initial tax relief and so your investment is given an immediate boost. This is particularly important for higher rate or additional rate taxpayers, who will benefit from 40% or 45% initial tax relief, especially if they might be basic rate or even non-taxpayers in retirement.

If you pay into a company scheme, then you are also likely to benefit from employer contributions too. However, you cannot access any of your pension money until you reach the age of 55.

ISAs, however, are also tax-efficient and you are able to access your money whenever you like, making them more flexible than pensions.

If in doubt about where to invest, your best bet is to visit an independent financial adviser who can discuss which options are likely to suit your financial objectives.

As of April 2017, you can also pay in to a Lifetime ISA which can help you to save for your retirement. You will be able to pay in £4,000 a year, and the government will top up your contribution by 25%. You can read more about this in our article.

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