Read about ISAs
Make the most of your ISA allowance
The latest ISA rules could change the way you save. We outline what they are and what they might mean for you, and your money.
New ISA rules, which came into effect on 6 April 2016, allow ISA providers to offer more flexibility in how you can access your savings.
Changes to the way you withdraw and pay back
The changes allow you to withdraw and replace money from your cash ISA within the same tax year without the replacement counting towards your annual ISA allowance.
The flexibility of your ISA will depend on the terms and conditions of your ISA product. You should check with your individual ISA provider to find out whether their products offer ISA flexibility before making a withdrawal.
Clare Francis, Savings and Investments expert at Barclays, clarifies the new ISA rules. ‘Previously if you used your full ISA allowance, but then needed some of the money and had to withdraw it, you wouldn’t be able to put any back into your ISA for the remainder of that tax year,’ says Clare. ‘But now with the new ISA flexibility, providing the money is placed back in the ISA within the same tax year, the tax free status will not be lost.’
For example, if in the 2015/16 tax year, you’d saved the full £15,240 and then withdrew £2,000, you wouldn’t have been able to deposit any more into the ISA because you’d have already used your tax-free allowance. Now, you’ll be able to redeposit the £2,000 into your ISA. The redeposit must be made within the same tax year or it’ll count towards your annual ISA allowance for the following tax year.
The new Personal Savings Allowance
The introduction of the new Personal Savings Allowance changes how you pay tax on any interest you earn on your savings.
Your Personal Savings Allowance applies to the total interest you earn across the savings in all your bank and building society accounts but doesn’t include savings in an ISA, which continue to be free from UK tax.
Until 5 April 2016 the interest on your savings outside of an ISA was subject to tax, but now you have a Personal Savings Allowance (PSA), so you can earn a certain amount of interest tax-free.
The size of your allowance depends on your annual taxable income, which includes your salary, interest from savings, some state benefits and most pension income.
- If you’re a basic-rate taxpayer, the first £1,000 of interest you earn is tax-free
- If you’re a higher-rate taxpayer, the first £500 of interest you earn is tax-free
- Additional-rate taxpayers don’t have a Personal Savings Allowance
As part of the new rules, the government has also confirmed that anyone with a total taxable income, including savings, of less than £17,000 in the 2016/17 tax year is unlikely to pay tax on any interest earned from their savings.
Before the changes, basic-rate taxpayers lost £20 for every £100 in interest. Under the new rules, basic-rate taxpayers can earn £1,000 before paying tax, which according to the government means 95% of people won’t pay tax on their income from savings.
Any interest you earn above your PSA is subject to tax and it is your responsibility to ensure that any tax due on interest payments received is paid to the appropriate tax authority. For more information, read the guidance from HM Revenue & Customs.
Do I still need an ISA?
With most savers benefiting from the Personal Savings Allowance, you may question the continued relevance of holding money in a cash ISA. It’s important to remember that changes to your circumstances can affect your Personal Savings Allowance, and how quickly you reach your limit, but won’t impact how you save in an ISA. This includes:
- Moving into a higher income tax band
- The total savings in your accounts
- Changes to the interest rates on your accounts
So if your tax status changes or your interest rate rises, you may find the amount of interest you receive exceeds your annual PSA, and you’ll become liable to pay income tax on some of your savings income.
By having an ISA, you can save up to your £15,240 yearly limit regardless of your tax band or how much you have saved in your ISA, and continue to build up your tax-free savings year-on-year.
Clare Francis also explains why ISAs might still play an important part in your savings.
‘Remember that any interest earned on cash held in an ISA will remain tax-free, subject to changes in future years,’ Clare says.
‘And with ISA flexibility, it effectively enables individuals to move money in and out of their ISA within the same tax year. So while the new Personal Savings Allowance may make ISAs seem less important from a tax perspective, there are still considerable tax benefits to be had by using your annual ISA allowance,’ says Clare.
Tax rules may change again in the future and how they impact you will depend on your individual circumstances. We don’t offer tax advice. If you’re unsure about how you’re affected by new or future tax rules, seek independent advice.
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