An ISA, standing for Individual Savings Account, is a tax-efficient way to invest or save money. To encourage saving for the future the Government allows savers and investors to deposit money and invest it in an ISA account, without taxing any capital gains or interest made from the deposits.

Think of an ISA as a ‘wrapper’ in which to protect your investments and savings from tax. For the tax year of 2016, beginning the 6^th of April, savers can deposit and “protect” up to £15,240 in an ISA from the tax man. It is important to note that this allowance does not roll over, so if you do not use your full allowance one year, then you cannot add more than the limit the next year.

As of the 6^th April 2016 there will be three types of ISA:

• Cash ISA – A savings account, providing access to your cash deposit, usually with a defined interest rate. These are offered by most high street banks
• Stocks and Shares ISA – A ‘wrapper’ that allows you to invest in investment funds, shares and other investments. There’s no capital gains tax to be paid on profits made from share price increases, no tax on interest earned on bonds. For dividends paid out by shares or funds there is a £5000 tax-free allowance, after this basic-rate taxpayers will pay 7.5%, higher and additional will pay 32.5% and 38.1% respectively.
• Innovative Finance ISA – New for 2016, designed to keep up with innovation in finance, for savers using peer-to-peer lending platforms. Interest obtained on investments made through peer-2-peer platforms will be protected from tax.

You can split your allowance any way you feel, putting all £15,240 in a cash ISA, Stocks and Shares ISA or Innovative Finance ISA. Alternatively, you can divide up your allowance, for example putting £2000 in a Cash ISA and investing £13,240 in a Stocks and Shares ISA.

Another introduction in April is the ability for investors to be able to withdraw and redeposit money without affecting their yearly allowance. Before this change, if you were to invest £12,000 and then withdraw you’d then only be able to deposit £3,240. Now you can keep withdrawing and depositing cash as long as the total deposited in the ISA at any one point exceeds the limit within the same tax year.

Making the most of your ISA

When looking to make the most of your ISA allowance, here are some points to consider:

• You should invest as much as possible at the start of the year, maximising your potential returns and thus maximising your tax efficiency.
• Make sure you have paid some money into an ISA before the end of the tax year; you can always invest it later. If you haven’t done so already you can open an account by clicking here.
• If you use up your tax-free allowance and want to continue investing then, you can open an Investment Account, but this will not be shielded from tax. It is always worth encouraging your partner to use their ISA allowance as well.
• If you are uncertain of how to invest using a Stocks and Shares ISA, start by reading our Top 10 Tips for first-time investors, then you could look to pick multi-asset investment funds we rate in our Top Funds.

Changes for 2016

In 2015, George Osbourne introduced radical changes to the savings of over 95% of the UK’s population. As of 6^th April this year, for basic tax rate payers the first £1000 savings from interest will be tax-free, for higher rate earners £500 will be tax-free. This allows at today’s best savings rates a basic-rate taxpayer to save around £74,000 without paying tax on the £1000 interest.

Many are arguing that change will effectively kill off the cash ISA. Along with other changes to ISAs allowing savers to withdraw and contribute to their ISA without using up their allowance, it could appear that ISAs and savings account have little that separates them.

But, if we look past the short term similarities, failure to use you ISA allowance now could leave you vulnerable in the future. With the prospect of saving over a long period ISAs offer protection to your savings against interest rate rises. Though the prospect of an interest rate rise sounds inviting to get better returns on savings, consider our historically low rates at the moment, if these savings rates were to rise to 3 percent would put an account of £35,000 over the £1000 tax-free threshold. Raise the rate to 4 percent and the tax-free savings amount falls to £25,000 – that’s less than 2 years ISA allowance.

Switching ISAs

It is possible to switch ISAs from previous years’ allowances without losing the tax-free allowance, just caution should be taken in the way it is done. The golden rule when switching ISAs is: Do not withdraw funds from your original ISA. Doing so will mean you’ve used up your tax-free allowance for the year and not let you contribute to the ISA you’d like to switch too. Instead, you should contact your current provider requesting a switch and get in touch with the new ISA supplier. On filling out the appropriate paperwork your funds will be transferred over, and you’ll retain your tax-free allowances.

If you’d like to switch to Strawberry Invest’s ISA, please contact our expert team and we will guide you through the process.