ISAs 2008: What you need to know

February, 27, 2008

An old saying about money goes something like “in the good times save, so in the bad times you can spend it.” That’s all very well, but what if like many of us you agree with wise old sayings, you just don’t actually abide by them?

Here at SaveBorrowSpend we have people who are wise owls with money and others who are, ahem, not. This quick guide to a tax-free method of saving, the Individual Savings Account (ISA), might answer some basic questions to get you started investing again in 2008. In case, of course, 2009 is really bad.

News: Don't 'miss out' on ISA savings 

The rules around ISAs are actually quite complicated and there are lots of different products on the market, both mini, maxi and cash designed to meet all sorts of different financial circumstances. This guide doesn’t go into those in great depth, but explains the very basics to help you on your way… and gives you some news about changes taking affect in April this year.

What is an ISA?

ISA stands for Individual Savings Account, but on an ISA you don’t pay capital gains tax on the interest (like you do in other savings accounts). Furthermore, you can have a combination of savings, i.e. cash and shares in the same ISA. As the word “individual” suggests, you can’t have a joint ISA and you can’t open one for somebody else. Remember, the ISA is the account type itself, not what you put in it.

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Why do ISAs exist?

In 1999 the government got rid of TESSAs and PEPs (remember them?) and consolidated them into the ISA. This is designed to encourage us to save a modest amount, thrift obviously being a Good Thing.

No Tax? That’s great! How much can I save?

In any given tax year (i.e. April 6th this year to April 5th next year) you can invest up to £7000 (which can be a combinations of cash and shares depending on the ISA). If you want to make monthly savings into your ISA you can pay a maximum of £583.

Taking money out of your ISA

This is generally allowed, and you won’t necessarily lose the tax benefits either. It depends on your ISA and you need to check out the small print.

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Mini and Maxi ISA

There are two types of ISA and you may only open one type or the other per tax year.

Maxi – the majority of the value is shares: you can put up to £3000 in cash but could have the whole £7000 in shares if you wished. As a result the Maxi is going to be better suited for long-term investments.

Mini – these are in fact like two separate ISAs with one for cash and one for shares but they can be bought from different providers. You can put up to £4,000 in a Stocks & Shares ISA and up to £3,000 in a cash ISA.

ISA deadlines

Everyone over 18 is allowed to invest in an ISA, but you have to use your entitlement within the tax year, if you miss the deadline you can’t retrospectively use your allowance.  Hence there is an annual rush to invest in the month or so before each April deadline.

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Changes from April 2008

From April 2008, the overall limit for an ISA investment will rise to £7,200, of which up to £3,600 can be put in a cash ISA.  Also the distinction between mini and maxi ISAs will be scrapped; quite simply ISAs will be cash or stocks & shares.

Furthermore you will be allowed to transfer money from cash ISAs to stocks & shares ISAs, but will lose the tax-free benefits if you move from stocks & shares to cash.

The experts all agree that it is crucial to do the research and check the all the facts to ensure you get the right ISA for you.  Happy saving in 2008!

   SaveBorrowSpend                      Philippa Adam