On 18 March 2015, George Osbourne, the Chancellor of the Exchequer, announced the Government's proposals for changes in the way ISAs operate as part of the annual UK Budget statement. While the changes are designed to support small businesses and first time house buyers, a reduction in ISA interest rates has left those considering their saving plan wondering if ISAs are still a worthwhile savings option.
This week Money Dashboard user and Digital maven, Mike Hall, breaks down the ISA and what the new changes could mean for you...
What is an ISA?
An Individual Savings Account is a type of bank account, often referred to as a wrapper, available to over 16s in the UK. The main advantage of an ISA is that up to a certain annual limit, known as an allowance, the Government will not charge any tax on interest received from your investment. There are two main types of ISA: cash ISAs, and stocks and shares ISAs.
Changes as of April 2015
From the 6th April, the ISA allowance will increase from £15,000 to £15,240. This means you're able to invest up to £15,240 over the course of the financial year (up to 5th April 2016) and you won't have to pay tax on the savings. Invest any more, and you'll pay tax on the amount over the allowance. If you invest less than this amount, your allowance won't be carried over to the next year, but you will get a new allowance for 2016.
Changes planned for Summer 2015
The new rules on ISAs allow you to invest in securities (not just shares) in small and medium sized enterprises, and listed bonds issued by co-operatives and community benefit societies, provided they are listed on a recognised stock exchange. This means you have more options when it comes to investing your money in stocks and shares ISAs. This is especially useful if you are picky about which organisations you finance for ethical reasons, or know a small business you'd like to support.
Changes planned for Autumn 2015
Later in the year we'll see the introduction of the fully flexible ISA, explained more fully below. There is no date available yet for when this type of ISA will be launched, as the Government is planning to consult with representatives from the financial industry to plan the details.
Changes planned for April 2016
As of 6th April 2016, there will be no tax to pay on the first £1000 of interest earned from non-ISA savings accounts. This effectively defeats the benefit of ISA investment, as other savings accounts are likely to pay higher interest rates, and you won't be paying tax either way.
Disappointing Interest Rates on cash ISAs
The interest rates offered on an instant access cash ISA are around 1.5% (variable), which is significantly lower than that a regular savings account, which is around 6% (fixed). Although with a regular savings account you will pay 20% tax on any interest, the net (after tax) rate is still 2.5%, which is higher that a cash ISA, meaning you're likely to receive higher interest paying into a regular savings account than a cash ISA.
Fully Flexible ISAs
Currently, any investment into an ISA counts towards your annual allowance, regardless of withdrawals. So if you deposit £100, withdraw £100, then deposit £100 again, you will have used up £200 of your allowance, despite only having £100 in the account. With a fully flexible ISA, you can withdraw and deposit as much as you like, the allowance will apply to the balance deposited in your account over the end of the tax year. This will only apply to cash ISAs, however, not stocks and shares ISAs.
Stocks and Shares ISAs
Given the low interest rates on cash ISAs, stocks and shares ISAs may be a better investment for savers. Investing in stock markets is risky, there is a chance you will lose your money, but there is also a chance you will yield more profit than cash ISAs or other savings options. If you decide to buy stocks and shares to put in an ISA account, it's sensible to make use of an investment management service to ensure you are investing wisely.
Help to Buy ISAs
With a Help to Buy ISA, the Government will add 25% to the amount you pay in, provided the money is used to buy your first property. You can pay in a maximum of £200 per month, meaning you will receive a maximum of £50 a month support from taxpayers. You can only have one Help to Buy ISA per person, but if you are saving with a partner you can have one each, doubling your total allowance and the bonus you receive. The Government bonus can't be withdrawn from your account, and will only activate when your investment is used to buy a home (or a mortgage for a home) worth less than £450,000 in London or less than £250,000 anywhere else in the UK.
If you are saving towards buying a home, or have any other financial goals, Money Dashboard's free personal finance software is a great way to track your saving progress, and identify ways to save money in your monthly spending.
About the author
Mike Hall is a media and marketing professional, specialising in video production and content marketing. From Edinburgh, Scotland, Mike now lives in Glasgow. He has experience is short film production, podacasting and Internet radio, as well as having worked with SMEs in the technology industry, and private clients as a web designer, and an IT and marketing consultant.
