How do ISAs work?

JustEnough

Guys,

Having a bit of trouble getting my head around this.

I put money into my first ISA last year. £3600. On this I earned £86. I now have £3686 on this account. I understand the £86 was Tax free.

So now, has this ISA finished, or do I build on this?

My ISA allowance is now £5100.

So if I add the £5100 to £3686, ill have £8786. My big question is, will I earn Tax free interest on £8786, or do i have to open another ISA, deposit £5100 and only earn the interest on that amount?

Should I now just close my original ISA and put the money in a savings account?

Also, when is the best time to put the money into an ISA, if I put in £5100 in March 2011 will I get the full interest for 2010/2011 or just for one month?


All a bit confusing.....hope my post isnt!

Aegis

Don't close your existing ISA unless you need the money for something. Once money goes into an ISA, it is eligible for the tax efficiency indefinitely.

You can then choose to either contribute your additional £5,100 into the same ISA or, if you can find a better rate for new money, into a new account. If you wish, you can also transfer the original contribution (plus interest) to a different provider, though you should bear in mind that this MUST be done by going to the new provider FIRST and requesting an ISA transfer. If you try to withdraw the money from the first ISA and deposit it into the new provider's account, you may find yourself getting a call from HMRC informing you that you have exceeded the limit for the year. You might get away with it, but you might not, not really worth the hassle!

Don't forget your Stocks and Shares allowance as well, as that is often overlooked.

talexuser

look on it as the same as a building soc account, only tax free and only allowed to put in the yearly limit. Once you take money out you can't replace it, only put new money in to each yearly limit.

Interest is earned on a daily basis usually like any other savings acount on the total amount, and you can transfer to another cash isa account at any time if you find a better deal.

pqrdef

Check what interest rate you're now getting on last year's ISA. Nowadays all the "good" interest rates are only introductory and don't last more than 12 months.

Probably your best bet at this point will be to open a new one which accepts transfers and have the old one transferred in.

JustEnough wrote: »

Also, when is the best time to put the money into an ISA, if I put in £5100 in March 2011 will I get the full interest for 2010/2011 or just for one month?

The catch is, if you put £1000 in an ISA, withdraw it, and then put it back in again, that counts as £2000 towards your annual allowance, not £1000.

So, many people do prefer to keep their options open and not commit their money to an ISA until late in the tax year. Their aim is to end up with the maximum amount of money permanently tax-sheltered by not wasting any of the annual allowance.

nzseries1

I'd like to suggest Martin's great article on the subject:
http://www.moneysavingexpert.com/savings/best-cash-isa

dunstonh

Also, when is the best time to put the money into an ISA, if I put in £5100 in March 2011 will I get the full interest for 2010/2011 or just for one month?

Interest accrues daily. So, you will get it for as many days as you have it in the account.

So now, has this ISA finished, or do I build on this?

You have an annual contribution allowance which is currently £10,200. It is done by tax year. So, you can build up a large pot of tax free savings and investments over time.

You must not take the money out of the ISA. If you do that, you cant put it back in again unless you use up some of that years allowance. You can transfer it to another ISA manager though if you want to use a different provider.

Loughton_Monkey

.... so the bottom line for your new £5,100 is to shop around for the best rate on a Cash ISA that allows transfers in. This is unlikely to be your current provider, or if they are still 'high interest' it may be that your 'bonus' offer is shortly to come to an end. Put your £5,100 in, and then transfer your existing £3,686 in. Never take it out until/unless you really need it. The amount you gain in tax relief is quite small in any one year, but cumulatively over a long period, it is substantial.

VT82

pqrdef wrote: »

So, many people do prefer to keep their options open and not commit their money to an ISA until late in the tax year. Their aim is to end up with the maximum amount of money permanently tax-sheltered by not wasting any of the annual allowance.

Errr, surely if the aim is to maximise the amount of tax-sheltering, you would put it in an ISA at the start of the tax year (i.e. as soon as it becomes eligible for earning interest tax free)?

jimjames

VT82 wrote: »

Errr, surely if the aim is to maximise the amount of tax-sheltering, you would put it in an ISA at the start of the tax year (i.e. as soon as it becomes eligible for earning interest tax free)?

For a cash ISA this is definitely the case as there is no risk to your capital and you will get more interest tax free. Maybe for a shares ISA you might want to drip feed the money in to reduce risk or because you think market is overvalued.

It does always surprise me the level of activity at the end of March trying to get money into share ISAs when prices could rise as a result of extra money being committed.

psychic_teabag

VT82 wrote: »

Errr, surely if the aim is to maximise the amount of tax-sheltering, you would put it in an ISA at the start of the tax year (i.e. as soon as it becomes eligible for earning interest tax free)?

Currently it is possible to get a better net return from some taxable accounts than the gross return from an ISA. Thus it makes sense to keep the money where it is earning the maximum for as long as possible, before moving to an ISA to lock in the long-term tax-sheltering benefits.

Also, I guess the point pqrdef was making : if there's a short-term glitch in your budgeting, you might need to borrow some money from your savings pot. If you have already committed the money to an ISA, you can't put it back. But if you keep some money back in instant-access, you can borrow from it and repay as required, then commit what you can to the ISA at the end of the year.

Loughton_Monkey

VT82 wrote: »

Errr, surely if the aim is to maximise the amount of tax-sheltering, you would put it in an ISA at the start of the tax year (i.e. as soon as it becomes eligible for earning interest tax free)?

Two reasons many would not do this.

1. They can invest it at 4% or 5% gross while waiting for the end of the tax year.

2. You can expect the most competition (and therefore best deals) just before April.