Individual Savings Accounts (ISAs)

The standard ISA contribution limit for 2011/12 is £10,680, of which up to £5,340 may be placed in a cash ISA. For the recently – launched Junior ISA, the limit is £3,600. The main ISA limit will rise by £600 for 2012/13 (£300 for the cash component), but the Junior ISA ceiling will be unchanged.

Unlike pension contributions, there are no carry forward provisions for ISAs so maximising your contributions whenever possible is normally a wise move. With the higher rate tax threshold and CGT annual exemption both frozen in the coming tax year, the tax shelter offered by ISAs is become increasingly relevant:

• There is no UK tax on dividends in a stocks and shares ISA, although tax credits cannot be reclaimed.

• Interest is received UK tax-free in an ISA, other than from cash held in a stocks and shares ISA (for which a flat 20% rate applies).

• There is no capital gains tax on profits.

• ISA income and gains do not have to be reported on your tax return.

With short-term interest rates seemingly set to remain at historically low levels for some time, the tax benefits of a cash ISA are small, even for 50% taxpayers. Variable rates of around 3% are on offer for new savings, but these rates normally contain a large bonus element which falls away after a fixed period, typically 12 months. If you arranged a cash ISA around this time last year, it is worth checking what interest rate your cash will earn after the ISA’s first anniversary.

If income from your ISA is important to you, a transfer of existing cash ISAs to a stocks and shares ISAs is an option worth reviewing. A transfer would mean an end to the security of a capital deposit, but your income could rise significantly.

If you have any questions regarding ISAs and tax planning, please contact us on 020 3865 2379

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