Savings account Guides

ISA allowance 2012/3: How much can I save?

Thursday 16 February, 2012

By Martin Fagan

Brits will be able to squirrel away an extra £600 a year into an ISA (individual savings account) as of April 2012.

The annual ISA (individual savings account) allowance will increase in the new tax year (6 April 2012 - 5 April 2013) to £11,280 from £10,680.

ISAs enable Brits to save in a tax-efficient way by putting a “wrapper” around a savings product which means they will not be taxed on any interest, dividends or capital gains.

Up to half of this coming tax year’s allowance - £5,640 - can go into a cash ISA and the rest can go into a stocks and shares ISA. Alternatively, you can put the whole £11,280 allowance into a stocks and shares ISA.

In the tax year 2010/11, the limit for a cash ISA was £5,100 and the limit for a stocks and shares ISA was £10,200. This was an increase from the previous £3,600 for cash ISAs and £7,200 for stocks and shares ISAs in 2009/10.

• Why is the annual ISA allowance going up?
• Cash ISAs
• Stocks and Shares ISA
• ISA transfers

Why is the annual ISA allowance going up?

In the government’s emergency Budget, in June 2010, the coalition promised to increase the yearly ISA allowance in line with inflation, as measured by the level of the retail prices index (RPI) to September 2010.

In the year to September 2010, the RPI rose by 4.6%, and therefore the ISA allowance was increased accordingly.

Technically, a 4.6% increase would have pushed the ISA limit up by £469.20, but the Treasury wanted to make any new limit easily divisible by 12 to assist those with monthly savings plans.

As a consequence, it decided to increase the limit by £480, setting it at £10,680 for the 2011-2012 tax year, or £445 a month into a cash ISA and £890 a month into a stocks and shares ISA.

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Cash ISAs

A cash ISA is similar to any other ordinary savings account, just with one key difference; savers are able to earn interest on their money tax free.

With the new changes, the maximum amount you are able to save in a cash ISA over the 2012/13 tax year has jumped to £5,640 - or £470 a month.

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Stocks and Shares ISA

A stocks and shares ISA is very different from a cash ISA. With a stocks and shares ISA you are able to invest your money into a range of investments such as investment trusts, government and corporate bonds, unit trusts, and open-ended investment companies (OEICs).

As a result, these ISAs come with an element of risk because your investment could go either way - up or down. If you plan to take this route, be sure to get some independent financial advice. In 2012/2013 you will be able to invest up to a maximum of £11,280 in a stocks and shares ISA or £940 a month.

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ISA transfers

If your current crop of cash ISAs is paying a miserly rate, you can transfer your ISA to another provider paying you a higher level of interest on your savings, so make sure you keep an eye on the market and the different rates.

The vital thing to remember is not to withdraw your cash when you want to transfer, as you will lose all the tax benefits. Instead, talk to your new provider who should sort out the transfer process for you, keeping the tax benefits intact as your savings are ported from on ISA to another.

Also, you are able to transfer your previous years' cash ISAs into stocks and shares ISAs without affecting your current year's ISA allowance.

You should also know that, although you can switch your savings from a cash ISA into a stocks and shares ISA, you can't move money from your stocks and shares ISA into a cash ISA.

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