60 second guide to new Isa rules and limitsChanges to cash and stock and shares Isas
11 December 2012
Chancellor of the Exchequer George Osborne announced changes to Isas in his Autumn Statement. We explain what this means for your tax-free savings.
Increases to cash and stocks and shares Isa limits
The overall amount you can put into an Isa will increase from the current £11,280 to £11,520 in April 2013.
The increase is worked out using the consumer prices index (CPI) measure of inflation. CPI was 2.2% in September, the month used for Isa limit calculations, giving an increase in the Isa limit of £248. This figure is then rounded to the nearest £120, giving an increase of £240 and bringing the new Isa limit for 2013/14 to £11,520.
The amount you can pay into a Junior Isa will also rise in April 2013, from £3,600 to £3,720.
No change to proportion held in cash Isa
Up to half of the total tax-free Isa amount (£5,760 in 2013/14) can be placed into a cash Isa. Many observers had predicted that Osborne would remove this 50% limit, allowing savers to keep the whole £11,520 Isa limit in a cash Isa. However, they were disappointed and the split remains.
Any money not paid into a cash Isa can be paid into a stocks and shares Isa, up to the overall Isa limit of £11,520.
Stocks and shares Isa investments set to change
George Osborne also announced in the Autumn Statement that the government will consult on expanding the list of investments that can be held within a stocks and shares ISA. The proposals could mean that you'll be able to hold in an Isa riskier shares that are traded on markets consisting of smaller companies, such as the Alternative Investment Market (AIM).
Why invest in an Isa?
When you put your money into a savings account, you'll usually pay tax at your marginal rate on the interest. Similarly, when you invest directly in stocks and shares, you'll pay tax on the dividends, and possibly also on any capital gain when you dispose of your investment.
Savings held in a cash Isa can grow tax-free, while investments held in a stock and shares Isa are free of capital gains tax and higher rate tax (although you can't reclaim the basic-rate tax of 10% on dividends).
Even though the chancellor of the exchequer increased the threshold above which you pay the higher rate of tax to £41,450 in 2013/14, more people are expected to be drawn into the higher-tax-rate net in the coming years. It therefore makes sense to shelter as much of your savings and investment pot from HMRC as possible.
For example, £5,000 in a savings account paying 3% would earn £150 interest a year. However, a higher-rate taxpayer would have to hand £60 of this over in tax. If the money had been saved in a cash Isa, you'd be able to keep the full £150.