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Feb 2013

5 Good Reasons To Use Your ISA Allowance By 5th April 2013

At the start of each financial year, HMRC set a cap on how much each individual can put into an ISA over the course of the next twelve months. You can either invest your full allowance in an investment ISA, or put up to half in a cash ISA and the rest in an investment ISA. This year's allowance is £11,280, which gives you up to £5,640 to put into a cash ISA.

But why should you use your ISA allowance? Perhaps you feel like it's not really relevant to you because you already have a different type of savings or investment plan, or maybe you're not sure what an ISA involves.

Here's why you should use your ISA allowance, and use it now:

(1) It's effectively free money from the Government

An ISA can provide a really tax-efficient way to save. Whether you choose a cash or an investment ISA, it can help you shelter some of your savings from the taxman. These perks can translate to some impressive savings, particularly if you're a higher or additional rate taxpayer.

(2) You don't pay income tax on cash ISAs

You don't pay tax on any interest you earn from the cash in your ISA, and there's no need to declare it on a tax return. If you're a higher rate taxpayer this means that you get to keep hold of 40% more of your hard-earned cash than you would in non-ISA savings account.

(3) ISAs are easy to understand, even if you're a savings novice

Opening a cash ISA can be as easy as opening a current account - some providers even let you do it online if you already have an account with them. You can make saving a habit by setting up a direct debit into your ISA each month.

(4) You can transfer any existing cash ISA balance free of charge

So, you opened a cash ISA in 2003 with the best of intentions, and promptly forgot about it. If you find it's now no longer paying competitive rates, you can transfer this existing cash ISA balance to a new ISA provider, free of charge, without it affecting your allowance for the current tax year. Say you have £1000 stashed away in your old ISA. You will usually be permitted to transfer this into a current ISA in addition to any deposits you make this tax year. So, if you transfer your £1000 balance into a cash ISA before 5th April 2013, you can still add up to £5,640 (the maximum cash ISA allowance) on top of this. Do this every year, and you could eventually be looking at a sizeable sum - that'll stay tax-free year after year. You can also transfer your existing ISA balance into an investment ISA, but be aware that this may incur charges.

(5) If you don't use it, you'll lose it

You can't roll over ISA allowances from year to year - you have until 5th April 2013 to put money in, no exceptions. You'll start the new tax year from 6th April 2013 with a new allowance - which in 2013/14 will be £11,520 - a 2.1% rise on the previous year. Of this, £5,760 can be placed in a cash ISA.

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