Individual Savings Accounts (ISAs) are tax-efficient savings vehicles that allow you to save and invest without having to pay income tax or capital gains tax. They can be a good way for people to start saving or to add to their existing portfolio of savings and investments.
The ISA allowance for the 2017/18 tax year has risen from £15,240 to £20,000, offering a welcome additional incentive for savers – and not only for existing ISA investors, but also for those who might be new to tax-free saving.
Investors used to be able to save a maximum of half their allowance into a cash ISA, while those who decided to put less than this into a cash ISA could invest the balance into a stocks and shares ISA. However, under reforms introduced from 1 July 2014, you can allocate your entire ISA allowance of £20,000 across cash, stocks and shares, or any combination of the two. Moreover, you can transfer savings from your stocks and shares ISAs to your cash ISAs, and vice versa, and can also transfer your ISAs between providers as often as you wish, subject to your providers’ rules.
Even if you cannot afford to take advantage of the full annual ISA allowance, it is still worth putting away what you can via a regular savings plan, which can start from as little as £50 a month. Although you are not allowed to hold an ISA with or on behalf of someone else, you can open a Junior ISA for a child under the age of 18.
According to HM Revenue & Customs, around 12.7 million individuals subscribed to ISAs in the 2015/16 tax year. Although this was lower than the 13 million who subscribed in the previous year, the amount subscribed – £80bn – was more than £1bn higher. This suggests subscribers are taking advantage of increasing ISA allowances and greater flexibility to invest more on an individual basis. Average ISA subscriptions in 2014/15 were more than 7% higher than in the previous tax year.
Above all, do not forget one of the golden rules of ISA investing – if you do not use it, you will lose it. It is worth trying to make the very most of your allowance each year if you can. Please note that levels and bases of, and reliefs from, taxation are subject to change.