Essential Guide To Understanding Isas In 2011

By Author: Malcolm Anderson
Total Articles: 6
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In April 5, at the start of the new tax year, the Treasury will raise the overall annual ISA Allowance from £10,200 to £10,680. This change spells good news, since the amount you can save tax-free will now also increase.



The following guide explains what ISA’s are and how you can benefit from them, especially now that the 2011 ISA Allowance brings added advantages.



Introducing ISAs



ISAs, which stand for Individual Savings Accounts, are the tax-exempt savings plans that replaced PEPs and TESSAs in April 1999. They are an effective way for you to both invest and minimise the tax you pay on your savings.



An ISA itself is not an investment - it's an account you put your investments into so that you can protect them from the taxman. In other words, any growth your investments see while being under the ISA ‘wrapper’, no matter how much, will be free from income and capital gains tax.



There are no charges for taking out an ISA – you will only pay the fees relating to the underlying investment ...
... fund you choose.



ISAs have become popular over the years for the tax benefits they offer – recent figures show that currently more than one in three adults own one. You do not even need to mention ISAs on your tax return. While ISAs have no fixed investment term, to get the most from them they should be considered as long-term savings.



Following from the new changes in government legislation, ISA limits are from this year tied to the Retail Prices Index (RPI), whose figures are released each September. Any increase will apply to the ISA Allowance for the following tax year and if the annual RPI is negative, the ISA allowance for the following year will remain unchanged.



Benefits of ISA's



Here is a summary of the main advantages you can enjoy from ISA’s:

No capital gains tax – no matter how much your investment grows over time.
No income tax – this is especially beneficial if you're a higher-rate taxpayer.
Tax-exempt funds – every year you will have a maximum overall ISA Allowance which is free from tax. You can even double your allowance if your spouse also invests in an ISA. See below for more details on how the allowance is changing this year.
Tax-friendly revenue – the income you receive from holding bond funds in an ISA will be free from income tax.

Types of ISAs and the 2011 Allowance Changes



There are two main types of ISA – both have their perks and the one you choose will depend entirely on your individual needs.



Equity or Stocks and Shares ISAs


These ISA's include shares, bonds or funds based on shares or bonds. The way they work is that you invest in funds which in turn invest in shares that are quoted on global stock markets. While Equity ISAs are more risky than the cash variety, they have the potential for greater returns. You can invest a maximum of £10,200, and this figure will rise to £10,680 in April of this year.



Cash ISAs


With this option, your investment risk is kept to a minimum. The maximum amount you can invest in a Cash ISA is £5,100, which will soon increase in April by £240, amounting to £5,340.



Combined – Overall Allowance


You can also choose both Cash and Equity ISAs. As mentioned above, your overall 2011 ISA Allowance will be raised to £10,680 in total on April 5. It is also possible to transfer the money you hold in a Cash ISA to an Equity ISA, without affecting your annual allowance or the tax status of the investment.



Conclusion



The newly revised 2011 ISA Allowance means that you can reap the savings benefits of ISAs more than ever before. In the current economic climate where everyone is feeling the pinch, legally sheltering a portion of your money from the taxman is certainly a sound financial move that is well worth considering.



About the Author: Malcolm Anderson is an independent advisor on the 2011 ISA Allowance.