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.
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.
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.
- Only higher rate taxpayers pay tax on share dividends.
- Income from cash, corporate bonds and gilts is taxed for both lower rate and higher rate taxpayers.5
- Also consider your future liability for capital gains tax on share gains.
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.
- Also known to the government but to nobody else as the ‘subscription limit’. [↩]
- Aka Junior NISA [↩]
- Parents or guardians must open Junior ISAs for children under 16 [↩]
- 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. [↩]
- 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. [↩]
- The effective tax rate on share dividends is lower than on bond income, so do your maths carefully. [↩]