ISA Allowances for Current Tax Year

INVESTMENT LIMITS
The overall ISA investment allowance for 2010/11 is £10,200 and up to £5,100 of that can be saved in a cash ISA with one provider.  The remainder of the £10,200 can be invested in a stocks and shares ISA with either the same or a different provider.  For example, you could choose to save £1,000 in a cash ISA with one provider and £9,200 in a stocks and shares ISA with a different provider.

The ISA rules were simplified somewhat from 6 April 2008 with the complicated distinction between Mini and Maxi ISAs being abolished.  There are still two different types of ISA, however, Cash Accounts and Stocks and Shares Accounts.

You must be a UK resident aged 18 or over to invest in a stocks and shares ISA, UK residents aged 16 and over can invest in a cash ISA.

CASH ACCOUNTS
Cash ISAs are simply bank accounts which sit within the tax benefits of the ISA wrapper and are therefore amongst the most straightforward products in the financial market.  Cash ISAs are entirely free of income tax, therefore, if you earn £1 in interest, you receive the whole lot.  On a normal bank account, basic rate taxpayers currently pay tax of 20p on that £1 while higher rate taxpayers are liable to pay a further 20p.

STOCKS AND SHARES ACCOUNTS
The non-cash element of an ISA can be invested via a stocks and shares ISA in a variety of different forms of asset, including collective investments such as unit trusts, open ended investment companies (OEICs) and investment trusts, or in directly held shares.

Typically, if you are investing for the medium to long term, periods of 5 or more years, a stocks and shares ISA is recommended.

Similar to cash, the interest on fixed interest securities such as corporate bonds are also tax free.  However, unlike cash, the capital value of fixed interest funds can fluctuate and there is the possibility of a tax free capital gain as well as tax free income, of course, this also means that there is a risk of capital loss.

Basic rate taxpayers currently pay 10% tax on dividend income from UK shares.  This is taken in the form of advanced corporation tax (ACT).  This tax is not refundable within an ISA, regardless of the tax position of the investor.  In light of this, you could argue that a stocks and shares ISA invested in shares of UK companies offers little benefit to a basic rate taxpayer, however, the fact that no capital gains tax is payable is of benefit.  In addition, higher rate taxpayers benefit from not paying additional income tax on dividends.  Dividends received from overseas companies will normally be entitled to a 10% tax credit in the same way as UK dividends meaning no further tax liability for investors within an ISA. 

Some other points worth noting in respect of the new rules from April 2008:-

" ISA savers will be able to transfer money saved in their cash ISA to their stocks and shares ISA.
" All Personal Equity Plans (PEPs) will automatically become stocks and shares ISAs.
" Mini Cash ISAs, TESSA-only ISAs (TOISAs) and the cash component of a maxi ISA will automatically become cash ISAs.
" Mini stocks and shares ISAs and the stocks and shares component of a maxi ISA will automatically become stocks and shares ISAs.
" Please note that you can only have one cash and one stocks and shares ISA with one provider in each tax year.

Please email kate.brown@milnecraig.co.uk for more details on ISA opportunities.

© 2009 Milne Craig Chartered Accountants