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The annual ISA allowance

How much can you put in your ISA piggy bank this year?

The annual ISA allowance is set every year by the government. The allowance1 is the maximum amount of new money you can put into a tax efficient ISA during each tax year.

The tax year runs from 6 April to 5 April the following year.

The ISA allowance for the current tax year to 5 April is £15,000.

There’s also a Junior ISA2 for anyone aged under 183.

The Junior ISA allowance for the current year is £4,000.

Note: The annual ISA allowance is the amount of new money you can put into an ISA during each tax year.

If you already have ISAs with funds in them from previous years, that money doesn’t count towards the annual ISA allowance. Only new money put into your ISA accounts does.

This enables you to build up an increasingly large ISA pot over time. See HMRC’s New ISA FAQ for more details.

The new annual NISA allowances

You may recall the complicated rules of the old ISA system, which were seemingly made up by a bureaucrat with a grudge against humanity.

There were rules about how much you could put into cash versus shares ISAs, and other fiddly things.4

The great news is that’s all been done away with.

Everything changed with ISAs in the March 2014 budget – and for once things got simpler and better.

All of the frustrating ISA rules went. At the same time the annual ISA allowance was raised to £15,000 a year.

You can now put all that annual allowance into a cash ISA if you want, or you can put it all in a shares ISA, or you can split it however you fancy.

You can also transfer existing ISA funds between the two kinds of ISAs, without losing tax protection or using up any of your annual allowance.

So you can transfer funds from an existing share ISA to a cash ISA, and vice-versa.

ISAs even have a new name – NISA – although as I write it’s still unclear whether this new name will stick. NISA stands for ‘New ISA’, but it could easily stand for ‘Nicer ISA’.

By the way, all your existing ISAs now fall under the NISA rules. There’s not one set of old rules applying to previous years’ allowances, and other rules for new ISA money, or anything like that.

The not so nice side of NISAs

Updating this article on annual ISA allowances, I am cackling with joy as I delete huge paragraphs of caveats and complications that you used to have to worry about with ISAs

I’m also deleting confused queries from readers in the comments regarding the old ISA regime, since in this new NISA order, everything is golden and sunshine.

Right?

Well, not quite.

The trouble is that the new NISA rules were rather sprung on the fund platforms and brokers. Some platforms reportedly struggled to adapt their systems in time to accommodate the new arrangements, such the raising of the limit to £15,000 in July (a few months into the tax year) and the flexibility to move back from shares to cash without leaving the NISA ‘wrapper’.

I think it’s likely that in the long-term the two kinds of NISA – cash and shares – will merge, at least so that stocks and shares NISAs pay a decent enough interest rate on cash within a shares NISA to dissuade people from bothering to transfer out to a different NISA provider if they want to go to cash.

But this has not started to happen yet, at least not so far as I’m aware.

Even under the old system, just transferring share ISAs from one platform to another could take weeks if not months. So it seems certain that transferring a share ISA to a cash ISA will be needlessly frustrating while everyone learns the ropes.

If you or anyone you know has done the deed, please do share your experiences in the comments below.

Also, while many people will be thrilled that the full annual allowance can now go into a cash ISA, the fact is the banks don’t need any more of our money.

Banks are still not lending much, and they have plenty of cash on hand for what they do lend out. This is one reason why cash ISA interest rates have actually been cut by many banks, even as the profile of ISAs has soared.

I’d suggest it’s also another sign that most people still think cash is king, and hence I suspect UK shares will likely prove to be a far better bet than cash from here, in the long-term.

How to use your NISA allowance

With all this flexibility, it’s only going to get more important to think about what should be your top priority when using your ISA allowance.

Accessibility and tax are the two main considerations.

Accessibility is important because once you remove money from an ISA – as opposed to transferring it from one ISA to another – you can only put it back into an ISA as part of a future annual allowance. You should not use a cash ISA for a short-term savings account, in other words, unless it represents all your savings, in which case it won’t do any harm (but try to save more!)

Moving money out to pay for odds and ends is a waste of the ISA allowance. Instead, try to build up your ISA savings over the long-term. You only get one allowance a year and you can’t reclaim from previous years where you didn’t use up all your allowance.

Saving on tax is the main attraction because, together with pensions, ISAs are a private investor’s top tax-protection shield.

Here you need to think about how you specifically are taxed on cash, shares, bonds, and any other assets you own.

From an income tax perspective, most lower rate tax payers who own bonds should put them into an NISA first, and then put dividend paying equities in if they have any spare NISA allowance leftover.

Higher rate taxpayers should put whatever they can into an ISA. You might put your highest yielding shares or bonds into an ISA first, to protect the income they pay from tax.6

Even if you’re a lower rate taxpayer and you own no bonds, I’d still put your shares (whether directly owned or held in an index fund or similar) into an NISA wherever you can. This is to avoid you building up a capital gains tax time bomb, which can really take the shine off selling your shares when the time comes.

What’s more, you might become a higher rate taxpayer in the future, and then pay tax on share income, too. Put them in an ISA now and you’ve no worries.

Shielding your investment returns from tax like this can make a huge difference to your end result from investing.

Monthly savings into an ISA

As previously with ISAs, the government has set the level of the NISA allowance to make the maths easy when you’re setting up regular monthly savings into a NISA.

Dividing the 2014/2015 NISA allowance by 12 months, for example, gives us a saving target of £1,250 a month.

That’s quite a substantial amount for most people to save from their earnings.

One way to use your allowance up even if you don’t have that much to save from your earnings is to sell any non-NISA-d investments that you own that can be moved into an NISA. I’ve been doing this for years, because I foolishly didn’t bother with ISAs in my early investing.

If you’re thinking about funding your 2014/15 ISA allowance with share sales, then read my article about defusing capital gains tax on shares for some pointers on how best to sell.

  1. Also known to the government but to nobody else as the ‘subscription limit’. []
  2. Aka Junior NISA []
  3. Parents or guardians must open Junior ISAs for children under 16 []
  4. Believe it or not, the rules were even more complicated before that. A few years ago there used to be an utterly pointless insurance element, for instance. []
  5. If you’re on a very low income, you may be able to reclaim tax paid on savings from April 2015, as per the latest Budget. But the details are still to be confirmed. []
  6. The effective tax rate on share dividends is lower than on bond income, so do your maths carefully. []

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{ 19 comments… add one }
  • 1 gadgetmind November 23, 2012, 4:37 pm

    There are two specific cases where shares *can* be moved into ISAs without a disposal, and this is for SAYE and SIP shares within 90 days of exercise.

    SIP shares can also be moved directly into a SIPP (yes, I know!), which is very tax efficient.

  • 2 ermine November 23, 2012, 4:45 pm

    > and SIP shares within 90 days of exercise

    Damn, I didn’t know that. I knew you could shift SAYE but never realised it applied to shares incentive program shares too.

    FWIW they still come out of your ISA allowance, valued at the time of transfer in the case of SAYE shares ISTR,

  • 3 gadgetmind November 23, 2012, 4:52 pm

    Yes, you can do SIP to ISA, but if you do SIP to SIPP then you get the tax relief all over again.

    So, if you put £8k worth of SIP shares into a SIPP, HMRC will put another £2k into your SIPP, and a HR tax payer can then claim back another £2k.

    My company doesn’t have a SIP yet and I wish they’d get a move on!

  • 4 jimmy jones November 24, 2012, 12:52 am

    I am confused why transferring SIP shares into an ISA or SIPP is preferable to just selling them and transferring the cash (apart from saving on dealing fees). I have my first batch of SIP shares available next year, my current plan is to sell and put the proceeds into my SIPP.

  • 5 ermine November 24, 2012, 12:06 pm

    @JJ It is primarily the saving on dealing fees, though a much greater advantage can be it also helps you with CGT if your profits are > 10k, which mine are so I wish I’d known that I could have booted my SIP shares into my ISA before I filled it up.

    If you still work for the company then there are serious questions you need to ask yourself about whether you should hold SIP or SAYE shares after they become unembargoed/options exercised. This is because if the company becomes financially stressed both your income and your savings are at synchronised risk. If your capital gain is > 10k it definitely is worth transferring an ISA’s worth of shares into an ISA even if you are going to sell immediately afterwards and switch onto assets not related to the firm you work for. Or even if you draw it out and pay down the mortgage/throw a wild party. It is worth looking ahead to when your options mature, as if you have 5-year options purchased in the teeth of the credit crunch they may be coming out next year or the year after and you don’t want to have filled up your ISA beforehand if you want to use it to reduce or eliminate your CGT exposure. Some SAYE operators only seem prepared to shift the shares to their own ISA product, so you should research the possibilities available to you the year before, and no open an ISA if you have to open a company-specific ISA for your SAYE options as you can’t have two S&S ISAs in one tax year, or even close an existing one and open another.

    In my case I don’t work for the company any more and it’s a decent divi payer so I now have a massive lump of SIP and SAYE shares outside my ISA, because I didn’t get this right at all.

  • 6 gadgetmind November 24, 2012, 2:13 pm

    The advantage of moving SAYE or SIP shares directly into tax sheltered accounts is that there is no disposal for Capital Gains Tax purposes as you do it. Every year, I use one ISA allowance for SAYE shares, and then both myself and wife use our CGT allowance.

    Note that I haven’t yet done this with SIP shares but have with SAYE. I just get the certificate and send it off to HL along with instructions.

  • 7 The Investor November 24, 2012, 5:32 pm

    This share scheme specific stuff is simultaneously great input and well outside my circle of competence.

    Thanks both for sharing. I hereby appoint you chaps (beg you to accept) the role of chief acronymed work share scheme experts for Monevator!

  • 8 gadgetmind November 24, 2012, 6:04 pm

    Coo, and we hadn’t even got on to EMIs, ESPs, LTIPs or CSOPs!

  • 9 gadgetmind December 5, 2012, 4:35 pm

    The annual allowance will present me with a few problems, but at least we’ve had some notice this time and can do some planning.

    Time to brush up my Pension Input Period knowledge yet again!

    On a brighter note, the 120% GAD being restored will help a lot.

  • 10 gadgetmind August 19, 2014, 10:27 am

    Both the (N)ISA changes and the proposed pension changes in the budget are great new for those saving for retirement. Simpler, more flexible, and hopefully will give people confidence.

  • 11 Louise @ Good Financial Choices August 19, 2014, 12:11 pm

    A good reminder of the ISA rules, I’m keen to ensure that I use my full NISA allowance this year, and use the pay myself first philosophy.

  • 12 Gary P August 19, 2014, 1:19 pm

    A question re tax obligations on funds held outside of ISA/SIPP wrappers, i have often read on Monevator and elsewhere that Bonds should be kept inside a tax wrapper if possible to minimise tax obligations. My question is this I am investing in the Vanguard LifeStrategy 60/40 fund, essentially a “balanced” passive fund of funds with 60% in Equities and 40% in Bonds and Gilt’s – How will HMRC view profits on this type of fund, would 40% of any gain have to be attributed to the bonds element and therfore need to be declared or treated differently vs the equities element ?

  • 13 dearieme August 19, 2014, 1:50 pm

    150% GAD!!!!!!

  • 14 Hamzah August 19, 2014, 3:34 pm

    > essentially a “balanced” passive fund of funds with 60% in Equities and 40% in Bonds and Gilt’s – How will HMRC view profits on this type of fund…

    The easiest way to check this is to look up the fund in Trustnet. Under the dividends tab it will say whether the dividend is classed as interest (eg LifeStrategy 20% equity) or dividend (LifeStrategy 40% equity and up).

  • 15 Gary P August 19, 2014, 4:11 pm

    Thanks Hamzah

    As the VLS60 Fund is deemed to pay “dividends” and not “interest” and I remain a basic rate taxpayer, i think the tax treatment would be the same as for shares or any other equity only fund even when its held outside of NISA/SIPP Wrapper right ?

    I also re read the reportable income post from earlier in the year http://monevator.com/excess-reportable-income/
    and then checked where VLS60 is domiciled – happily its a GB ISIN so i seem to be off the hook for worrying about that little can of worms as well. !

    Appreciate the tip on Trustnet thanks again

  • 16 gadgetmind August 19, 2014, 4:26 pm

    When I wrote message 9, the drawdown limit was at 100% of the GAD limit but they’d announced it going back to 120%. The new 150% is a stopgap prior to this limit being (hopefully) remove forever.

  • 17 Hamzah August 19, 2014, 5:46 pm

    Hi Gary P, just be aware that it might be simpler to hold income units of a fund outside a tax wrapper, so that it is clear what dividend is received should you ever have to complete a self-assessment tax return.

  • 18 Nigel T August 19, 2014, 8:10 pm

    I would be interested in the issue of inheritance of NISAs. I recall reading that the tax protection wrapper is lost on death, even when the investment is passed on to a spouse. Is this correct?

  • 19 Andy August 19, 2014, 10:07 pm

    Nigel, yes. ISA will end on date of death.

    See “What happens if I die” at

    http://www.hmrc.gov.uk/isa/faqs.htm

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