An ISA is an excellent way to save or invest your money without having to hand over a significant amount of your earnings to the taxman. However, the tax benefits also mean that you are limited in just how much you can put into one of the sheltered vehicles each year as well.
By gaining a thorough understanding of ISA contribution limits, you will be sure to enjoy the full amount of advantages these investment and savings vehicles offer.
Limits by Age
Current changes to ISA rules have allowed those near retirement age to put much more money into their ISAs each year. As of the 2010 tax year, people over the age of 50 will be able to contribute as much as £10,200 into their ISAs each tax year. Individuals born after 5 April 1960 have a limit of £7,200. Rules will change on April 10 of 2010, so everyone will enjoy the £10,200 limit, regardless of age.
Limits by Account Type
Cash ISAs have stricter contribution limits than shares accounts. An individual can contribute up to £3,600 into a cash ISA each year if they are under 50 and £5,100 if they are over 50. However, shares ISAs can accept up to the full contribution limit each year, which is £7,200 for those under 50 and £10,200 for those over 50.
Some ISA providers may also have minimum amounts you must contribute to particular account types. Make sure you fully understand the terms of the ISA you open in order to abide by the guidelines established by the financial institution as well.
It is important to note that the full contribution limit cannot be exceeded each year, regardless of what types of ISAs are involved. This means that if you contribute £3,600 to a cash ISA in a given year, the most you can contribute to your shares ISA is also £3,600, to maintain the £7,200 limit. You could also split the money different amounts, such as £5,000 in a shares ISA and £2,200 into a cash account.
Cash contribution cannot exceed £3,600, and your total contribution cannot exceed £7,200 (or £5,100 and £10,200 respectively, under the new guidelines).
Transfer Limits
Transfers are not included in contribution amounts. This means you could invest the full £7,200 into your ISAs during a tax year and still move £10,000 from one ISA to another. It is actually a good idea to transfer ISA funds from time to time to ensure you continue to earn the highest possible rate of return on your money. However, transfers must be initiated through the receiving institution to be legitimate. If you withdraw money from your current ISA on your own, it counts as a withdrawal rather than a transfer, and it is subject to the contribution limits if you try to put the funds into another ISA product.
Contributing to an ISA each year is an excellent way to earn a return on your investment without having to pay tax on your earnings. By understanding the specific rules governing ISA contributions, you can ensure you reap the maximum advantage out of your savings or investment vehicle.
