If you’re a saver and you’ve not yet invested in an ISA this tax year, then the sooner you do -and make the most of your tax-free allowance – the better.
For anyone that doesn’t know, an individual savings account (ISA) is a tax-free savings vehicle that comes in two forms; stocks and shares ISAs and cash ISAs. You can compare these products at Moneysupermarket.com.
Stocks and shares ISA
If you choose to invest in a stocks and shares ISA then you can save up to £11,280 this tax year, which ends on April 5, 2013, and any money you make is not subject to the usual capital gains tax.
However, you should be aware that any return on your investment is not guaranteed as it is determined by how well your stocks and shares perform.
Alternatively, you could invest in a cash ISA, which acts very much like an ordinary savings account but any interest you make is yours to keep without the taxman taking a cut.
The most that you can invest in a cash ISA this tax year is £5,640 but if you have more to invest you can put it into a stocks and shares ISA provided your total investment in the two is no more than the £11,280 limit.
Investing in an ISA
If you decide to invest in an easy access cash ISA you will be able to withdraw your money whenever you need to. However, because any savings you have within an ISA are tax free you should try and keep it there for as long as possible. As soon as you make a withdrawal you will lose the tax-free status on that money.
Therefore, if you’re a taxpayer a cash ISA should be the first savings account you open and the last you dip into.
You should try and make full use of your annual ISA allowance as this cannot be rolled over into the next year and to keep the tax benefits funds should be transferred, not withdrawn and re-invested, into a new account for the next tax year.
In addition, while you can switch from a cash ISA to a stocks and shares ISA you cannot transfer your stocks and shares investment into a cash ISA.
Why you should invest sooner rather than later
Next spring will inevitably see a surge in the number of ISA applications as savers try to beat the April 5 deadline, however, investing early is a much more tax efficient way of making an investment.
This is because by investing just before the deadline means that you will have missed out on almost a year’s worth of tax-free interest and so the sooner you can invest, the greater your returns should be.
And although most ISAs may not have as good a headline rate as some other savings accounts, fixed rate bonds for instance, they will always beat them for returns simply because of the tax benefits associated with them.
This is because standard savings accounts are subject to income tax which currently stands at 20% for basic-rate taxpayers, 40% for higher-rate taxpayers and 50% if you pay tax at the additional rate.
So get in early for your ISA, you can still beat the rush.