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10 things you should know about ISAs

C90HDF Multi-colored ceramic piggy banks. Image shot 2011. diversification and asset allocation multi-colored; ceramic; Piggy; b
C90HDF Multi-colored ceramic piggy banks. Image shot 2011. diversification and asset allocation multi-colored; ceramic; Piggy; b



Strictly speaking there are 11 things you should know about ISAs, but the first is purely this: ISAs are really handy ways to help you keep more of your money. To understand the best way to do this, you just need the ten other tips.

1. They are all about paying less tax
There a number of different types of ISA nowadays, but they all have one thing in common: your money will grow in an ISA without generating a tax liability. The only exception to this is the dividend tax on shares held in an ISA - which is capped at 10%.

2. You have an allowance every year
You can deposit £15,240 this year, and £20,000 next year. However, these work on a 'lose it or use it' basis, so if you let the tax year pass without making an investment, you will lose your allowance - and miss out on the chance to pay less tax.

3. Now is the time to be thinking about them
The vast majority of people leave it until the end of the tax year to think about their ISA - but it means they miss out on almost a year's worth of tax-free growth. Right now is the best time to be planning your ISAs for this year.

4. Cash ISAs remain the most popular form
These are essentially like tax-free bank accounts - and more so this year than previously because the rules have changed about withdrawals. Previously, if you maxed out a cash ISA and then withdrew some, you wouldn't be allowed to top it back up. From this tax year, you can top it up again - as long as you do so within the same tax year.

5. It's important to shop around
The rates on cash ISAs haven't been particularly impressive in recent months, so it's worth shopping around and making sure you'll still getting a competitive rate. You can only open one cash ISA each year, but you can arrange a transfer of existing ISAs, and if you start contributing to one ISA now and then see its rate drop, you can transfer to a better ISA later.

When you transfer, bear in mind that you cannot close your account and open another. You need to set up a new account with a provider that accepts transfers - then ask them to arrange the transfer.

6. Help-to-Buy is a kind of cash ISA
This is a new type of ISA, introduced last December and designed purely for people saving money for a property deposit. First time buyers can deposit £1,200 initially and then add £200 a month. When you withdraw the cash to buy a house, the government will give you a 25% cash bonus (up to £3,000).

7. The personal savings allowance doesn't make ISAs pointless
There's an argument that the new personal savings allowance makes getting a cash ISA pointless. This is because you need to have savings income of £1,000 before you are subject to tax on it now (£500 if you are a higher rate taxpayer), and this would require enormous levels of savings at the current low rates. Given that ISA rates aren't at their most competitive, it's tempting not to bother.

However, there are a couple of counter-arguments. First, if you save regularly and over the long term, you could easily end up paying interest. Second, if you get a pay rise and find yourself paying high rate tax, you could suddenly find your savings are taxable. And third, when interest rates rise, it will take far less in savings to trigger a tax bill outside an ISA. If you think there's a chance you will end up paying tax eventually - an ISA is well worth considering.

8. This year you can get a peer-to-peer ISA
A rule change means that if you use a peer-to-peer platform to lend money to individuals, you can do it through an ISA wrapper now. There are several well respected players in the market, which will help mitigate the risks, and once they have approved ISAs in place, they may be worth considering.

9. Stocks and shares ISAs offer investment potential
If you are investing for the long term, then in addition to cash, it's worth looking at stocks and shares ISAs. These can be used to invest in individual shares and bonds (usually through a platform wrapper), or more usually they are used to buy funds (either direct or though the platform wrapper again). They have the advantage of being able to grow tax free (aside from dividend tax), and they won't trigger a capital gains tax liability when you eventually sell up.

Your annual ISA allowance is split between cash and stocks and shares, so you can invest anything up to £15,240 this tax year - as long as when it is combined with any cash ISAs contributed to in this tax year it doesn't bust the limit.

10. Kids can have an ISA
The Junior ISA locks money away until the kids hit the age of 18 - at which case it rolls into a normal ISA and they are free to spend it as they wish. They have an annual allowance (£4,080 this year), and friends, parents and family can all contribute. There are cash or stocks and shares variations, and all growth is tax free.

Help to Buy Isa: Five Things You Need to Know
Help to Buy Isa: Five Things You Need to Know