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Your ISA Guide 2016/17

 

Don’t know your ISA from your NISA? Wondering what the difference is between a cash ISA and stocks and shares?

Read our beginners guide below and find the answers to your most commonly asked questions.

What is an ISA?

An ISA (Individual Savings Account) is a form of tax-free savings account designed for savers to hold cash or investments.

An ISA gives you a tax-free allowance each year. With a standard savings account, you are taxed on the interest that you earn.  With a tax-free ISA all the interest that you earn is yours to keep.

I keep seeing the term NISA?  Is this different?

ISAs have been around since 1999, but in July 2014 the government changed the rules as to how much you are entitled to save and the format in which you can invest.  These accounts are now known as New Individual Savings Accounts or NISAs, however to ease confusion we’ll still be referring to them as ISAs.

What is the 2016/17 ISA Allowance?

From 6th April 2016 the new tax year starts. The ISA allowance for the 2016/17 tax year will remain the same at £15,240.

The options for how to use your allowance are:

  • Save up to the allowance in a Cash ISA (you may only save into one Cash ISA however with NatWest you can also split the amount between a Cash ISA and Help to Buy: ISA)
  • Invest up to this amount in a Stocks & Shares ISA
  • Invest up to this amount in an Innovative Finance ISA (a new type of ISA for peer to peer lending)
  • Split your allowance between a Cash ISA, Stocks & Shares ISA and a Innovative Finance ISA (For example: Pay £10,000 into a Cash ISA and £5,240 into a Stocks & Shares ISA)

Are there different types of ISA?

Cash ISAs: A cash ISA is similar to a standard bank or building society savings account, the difference being that it enables you to earn interest tax-free.

There are various different types of cash ISA available, including instant access accounts and fixed-rate accounts.

Stocks and shares ISAs: This type of ISA can hold a range of funds, individual shares, government bonds and corporate bonds.  As with any stocks and shares investment this carries an element of risk and returns aren’t guaranteed – there is even a chance that you may lose money.  However, statistically, you are likely to achieve a higher return on your investment in the long-term as opposed to saving in a cash ISA.

You can use your allowance however you please – you could choose to invest the full amount in a stocks and shares ISA or place it all in a cash ISA.  Alternatively you can split your allowance between the two, it’s completely up to you.

Who is eligible for an ISA?

Anyone who is resident in the UK for tax purposes is entitled to hold an ISA.  You must be 16 or over to hold a cash ISA and aged 18 or over to invest in a stocks and shares ISA.

As the name suggests an ISA is for individual savers only, you cannot hold an account jointly with another person, or on behalf of someone else.

How much will an ISA cost me?

You don’t need to pay anything to open a cash ISA – although some accounts may expect a minimum deposit.  The most important thing is to find an ISA with a competitive rate of interest to give you the best return on your money.

With a stocks and shares ISAs you’ll likely incur a set up fee (usually a flat-rate) and often an annual charge (usually a percentage of your current investment).  You’ll also face charges for buying and selling funds so it’s important to look for a low charge if you are going to be actively trading funds.

How do I open an ISA?

ISAs are available from a range of providers including banks, building societies, credit unions, friendly societies and stock brokers.   Some accounts can be opened in person, others operate online only.

Use a comparison site to view the different types of ISA available from a range of providers.

Can I withdraw money from an ISA?

ISAs work best for savings over the long-term because of the compound interest i.e. earning interest on the interest, so if you can avoid making withdrawals this will help you to make the most of your money.

Some Cash ISAs will allow you to lock your money in for a certain period of time – and often these will give you a better rate of interest than easy-access accounts.  These are designed to avoid temptation as if you do make a withdrawal you are likely to face a penalty charge for doing so, and may lose out on any bonuses that the account offers.

However if you are using your ISA as a rainy day fund, there are going to be times when you need access to your money at short notice.  Look for an account that gives you the flexibility to do so without incurring penalty charges, the only downside being is that the rate of interest you receive may not be so good.

I already have an ISA but my rate has dropped. Can I transfer to another ISA?

Yes, you can transfer money in your ISA to another provider at any time but you should always check with your current provider that there aren’t any restrictions in doing so (i.e a charge).

In order to move your ISA whilst still enjoying your full tax-free allowance, you’ll need to fill in an ISA transfer form – your new provider will be able to provide this for you.

Is there an ISA for children?

Yes, there is. In 2011 the government introduced Junior ISAs to replace the now defunct Child Trust Fund.   The tax-free allowance in 2015/16 will be £4,080.

Any child under the age of 18 is entitled to hold a Junior ISA.  Parents or guardians can open the account and make regular deposits, however the money belongs to the child and therefore parents can’t make any withdrawals.  Children can take control of the account when they reach the age of 16, although they cannot withdraw any funds until they are 18.