Written by Karen Bryan
In the UK you can currently (tax year 6 April 2011 – 5 April 2012) put up to £5340 per annum in your Cash ISA (individual savings account) and receive your interest tax free. This is a good perk, as normally you have to pay tax at the rate of 20% on interest from savings, if your total income is above your tax threshold, £7,475 for the tax year 2011-2012. So if you have £5,340 in a Cash ISA earning interest at the rate of 3%, you’ll receive a payment of £160.20 in interest after 12 months. If you had £5,340 in a taxable saving account you would pay tax of £32.04 on that interest.
Update 6 April 2012 – The new annual Cash ISA maximum is £5,640 for the tax year 6 April 2012 – 5 April 2013.
Now while that doesn’t sound like a huge gain, if you have several years of Cash ISAs intact, you can receive tax free interest on them all. If you leave the interest in your accounts, them you start to get compound interest i.e. interest paid on interest already received. For us, Cash ISAs are part on our long term savings.
While you get the biggest benefit of the tax free interest if you keep your Cash ISAs in the long term, it can still be worthwhile keeping savings to which you may need access in a flexible cash ISA , so you can keep more of the interest earned on your savings.
It’s important to be aware that once you take money out of a Cash ISA you can’t replace it. As an example, I opened a Cash ISA on 6 April 2011 with a deposit of £5,340 but withdrew £2,000 on 12 August 2011 for an emergency. I can’t put that £2,000 back in later in the tax year, as I’ve already used my Cash ISA allowance for that 12 month period.
If you want to invest tax free in stocks and shares using an ISA, you can either invest at total of £10,680 in a Stocks and Shares ISA and forget about a Cash ISA, or put up to £5,340 in a Cash ISA and up to £5,340 in a Stocks and Shares ISA.
You’ll need to decide whether you should opt for a fixed versus variable rate cash ISA as part of your planning for the future strategy.