Sarah Bradford explains how to make the most of your ISA and NISA tax-free savings allowance.
In this year’s Budget, Chancellor George Osborne announced a number of measures of benefit to savers. These included the changes to Individual Savings Accounts (ISAs) and Junior ISAs.
What are the changes?
ISAs are changing. A new tax-free savings account, the New ISA (NISA), is to be launched on 1 July 2014. On that date, all existing ISAs will become NISAs.
The NISA has a number of advantages over the ISA:
- An increased subscription limit of £15,000; and
- Flexibility to invest the whole subscription limit in a cash account.
Until 1 July 2014, investments can be made in an ISA (rather than a NISA) in accordance with the existing ISA rules. This means that although the 2014/15 subscription limit is ultimately £15,000, prior to 1 July 2014, investments for 2014/15 must be made in accordance with the ISA rules rather than the NISA rules.
Under the ISA rules, the overall subscription limit for 2014/15 is £11,880 of which a maximum of 50% (£5,940) can be in cash.
From 1 July 2014, all existing ISAs become NISAs. The subscription limit is increased to £15,000 and the cap on cash investments is removed, enabling further investment to be made into a NISA from 1 July to the extent that the new subscription limit remains available. Any investments made on or after 6 April 2014 and before 1 July 2014 count towards the new £15,000 limit. Under the NISA, investors will also have new rights to transfer investments from stocks and shares to a cash account.
Watch the timing!
Where an ISA for 2014/15 is taken out prior to 1 July 2014, it will not be possible to open a new additional NISA after this date. However, it will be possible to make further investments to any existing cash or stocks and shares up from 1 July up to the new subscription limit. Investors should check the terms and conditions with their ISA/NISA provider.
Example 1 - ISA to NISA
George invests in an ISA on 6 April each year up to the subscription limit. On 6 April 2014, he invests £5,940 in a cash ISA and £5,940 in a stocks and shares ISA, a total of £11,880, which is the 2014/15 subscription limit at that date.
On 1 July 2014, his existing ISA becomes a NISA and the subscription limit for 2014/15 increases to £15,000. George is able to invest a further £3,120 in a NISA. The additional investment can be made in cash or in stocks and shares or a combination of the two.
A practical tip is that where sums are invested in a 2014/15 ISA prior to 1 July 2014, additional investments can be made on or after this date to take advantage of the increased subscription limit for 2014/15.
Example 2 - Timing further cash investments
Jenny is not comfortable in investing in stocks and shares, but invests in a cash ISA each year. She has heard that the new limit for 2014/15 is £15,000 and wants to make a cash investment up to this limit. However, until 1 July 2014 she is only able to invest £5,940 in a cash ISA.
From 1 July 2014, she is able to make a further cash investment of £9,060 (£15,000 - £5,940) to take her investment for 2014/15 up to the new limit of £15,000.
A further tip is that it is possible to invest £15,000 tax-free in a cash NISA for 2014/15. However, note that only £5,940 can be invested prior to 1 July 2014, with the balance of the investment being made on or after that date.
Practical Tip:
Make use of an ISA/NISA to enjoy a tax-free return on savings and investments. It is advisable to plan your tax-free savings and investments for 2014/15, in order to take advantage of the higher limits available from 1 July 2104 and the increased opportunity for tax-free cash savings.
