I AM SAVING UP FOR A HOLIDAY NEXT YEAR, SHOULD I PUT THE MONEY IN AN ISA?
Probably. A cash ISA (Individual Savings Account) is actually a very good place for savings – even if you intend to use the money fairly soon. Cash ISAs have two advantages over regular savings accounts. First, the interest rates on offer can be slightly higher even than the best non-ISA accounts. Second, the interest is paid free of all UK tax. But it will limit the amount you can save in a tax-free stock-market ISA (see question 9).
BUT I THOUGHT ISAs WERE FOR LONG-TERM SAVINGS?
They are. But they can be used for short-term savings as well. ISAs are not like the old Tessas. With a Tessa (Tax Exempt Special Savings Account), if you took the money out before the end of the tax year, you lost the tax relief. But an ISA is different. The interest accumulates tax-free and you can take money out during the tax year without losing the tax relief.
AREN’T THERE ANY RESTRICTIONS?
The main restriction is that you cannot put more than £3000 IN to an ISA during the tax year (that’s 6 April to the following 5th April). So if you put money in and out during the year, once you have deposited £3000 you cannot put any more in.
SO I CAN SAVE TAXFREE AT HIGHER INTEREST RATES FOR A HOLIDAY – OR CHRISTMAS?
Yes. Here’s how it would work. You’re saving for a great holiday next August. You need £500 and another £250 spending money. So you open a cash ISA with £75 and take out a standing order for that much every month. The best rate you can get on an instant access ISA is 7.25% per year (that is on an internet only account – they always offer the best rates.) The best non-ISA is 7% (also on an account you have to operate through the internet). So you get a quarter percent more, and it is all tax free.
HOW MUCH DIFFERENCE WOULD THAT MAKE?
On the non-ISA account you would earn £24.06 in interest over the ten months but the taxman would take nearly £5 of that off you, leaving £19.25 (£14.44 if you pay higher rate tax). If you saved in an ISA account, you would earn £24.92 interest, tax-free. So you gain nearly £6 if you pay basic rate tax or more than £10 if you are a higher rate taxpayer.
THAT DOESN’T SEEM VERY MUCH!
It’s enough for a couple of bottles of wine abroad – compliments of the Chancellor. That can’t be bad!
CAN I INVEST MORE IF I WANT TO?
Of course. If you want to put more money into a cash ISA you can – the limit for the amount you can put in by 5 April 2001 is £3000, the same as it was last year. It may fall to £1000 next tax year – but we don’t know the Chancellor’s plans yet.
APART FROM THE INTEREST RATE, WHAT SHOULD I LOOK OUT FOR?
You want instant access, no penalty for withdrawals, and a bank or building society you have heard of.
I THOUGHT ISAs WERE MAINLY FOR STOCKS AND SHARES?
On top of putting up to £3000 into a cash ISA you can also put up to £3000 during the tax year into a stock-market ISA, which invests in shares, Alternatively you can put £7000 in an ISA invested in shares – but that stops you putting any money into a cash ISA. So if you already have a cash ISA you cannot then invest more than £3000 in that tax year in a shares ISA.
CAN YOU TELL ME MORE ABOUT THESE SHARES ISAs?
I’ll do that next month.
2 September 2000
e-mail Paul Lewis on paul@paullewis.co.uk