ISA basics

ISAs have changed drastically over the past few years. Here's what you need to know.

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ISA basics
An Individual Savings Account, or ISA for short, is a vehicle that allows you to save or invest without paying any tax on your returns.

They were launched in 1999 and replaced personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs).

How much can I save into an ISA?

The total amount of money you can invest in one or more ISA is currently capped at £15,240 per tax year, which runs from April 6th to April 5th. This limit will apply for the 2016/17 tax year.

However, in his 2016 Budget speech, Chancellor George Osborne announced that this limit will jump to £20,000 from April 2017.

This will make investing into an ISA far more attractive as more of your money can be placed into the wrapper and shielded from tax.

But remember if you don't use your allowance in a tax year you will lose it.

There are many ways you can take advantage of your allowance. As well as the traditional cash ISA and Stocks and Shares ISA there's also the new Help to Buy: ISA, Junior ISAs for kids and soon the Lifetime ISA and Innovative Finance ISA. Here's what you need to know about the different types of ISA.

Cash ISAs

You can save all or part of your annual ISA allowance into a cash ISA.

These accounts are readily available from banks, building societies and credit unions and can take the form of an easy access account, notice account or a fixed-rate bond.

Compare cash ISA rates

Stocks and shares ISAs

Alternatively you can invest all or part of your annual ISA allowance into a Stocks and Shares ISA.

With a Stocks and Shares ISA you can choose how to invest your money. Investments can be made in individual company shares, unit trusts, investment funds, government bonds and corporate bonds.

Compare Stocks and Shares ISAs at loveMONEY.com

Junior ISAs

The Junior ISA, or JISA, is a way for parents to save or invest for their children tax free.

JISAs replaced Child Trust Funds (CTFs) in November 2011. Thanks to a change in the law in April 2015 millions of children that got stuck with CTFs are now allowed to transfer the money into a JISA.

The JISA allowance for 2016/17 is £4,080 and the money can be invested in a cash ISA and/or a Stocks and Shares ISA. Any money invested belongs to your child.

Compare Junior ISAs at loveMONEY.com

Innovative Finance ISAs

From April 2016 investors will be able to use an Innovative Finance (IF) ISA to get tax-free returns from the money they put into peer-to-peer loans made via platforms like Zopa, Funding Circle and RateSetter.

Investors will be able to spread their annual ISA allowance between the new IF ISA as well as a cash ISA and a Stocks and Shares ISA.

Help to Buy: ISAs

The Help to Buy: ISA was launched at the end of last year to help first-time buyers save a deposit for a home worth up to £450,000 in London or up to £250,000 in the rest of the country.

You can save up to £200 a month or £2,400 a year into a Help to Buy: ISA, which can be boosted by a Government bonus of 25% when you come to buy your first home.

Help to Buy: ISAs will be available until 30th November 2019 and you must claim your bonus by 1st December 2030.

Lifetime ISAs

The Lifetime ISA will be available from April 2017.

It will enable anyone aged between 18 and 40 to save up to £4,000 a year (which will form part of your total ISA allowance for the year) and receive a Government bonus of 25% each year until you reach 50.

Is an ISA still worth going for?

From April 2016 there will be a new personal savings allowance which will mean the first £1,000 of interest a basic rate taxpayer, or the first £500 for higher rate taxpayer makes will be paid tax-free.

However, this doesn't mean you should ditch your existing ISAs or not bother opening one at all. That's because ISAs help shield your savings and investments from tax in the long-term.

So while saving rates are low, the personal savings allowance may seem like enough as a basic rate taxpayer taking advantage of the top easy access account from RCI Bank paying 1.45% would have to save around £69,000 to hit £1,000 while a higher rate taxpayer would need to put away £34,500 to hit £500 of interest in a year. However, if the best rate on an easy access account were to rise to 4% a basic rate taxpayer would only be able to put £25,000 away and a higher rate taxpayer just £12,500 at this rate to keep returns tax-free.

Investments held within Stocks and Shares ISAs also benefit from being free of Capital Gains Tax (CGT). So for those likely to use up their annual £11,100 CGT allowance an ISA makes sense.

The ISA is also a lot more flexible than it used to be. Since April 2015 Stocks and Shares ISA can now be transferred to cash ISAs and vice versa.

From April 2016 savers will be able to withdraw and replace their savings within the same tax year without losing the tax-free benefits on the money too. So savers can cover their short-term needs without the long-term damage.

And ISA tax benefits can now be passed on to a spouse if the original holder died after 3rd December 2014.

Compare cash ISA rates

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