ISAs and NISAs can be very confusing things. This will hopefully make them much clearer.
1. ISAs have been replaced by NISAs
ISA stands for individual savings account. NISA stands for New ISA, and was introduced on July 1st 2014.
2. It’s a tax free account
You don’t get taxed on any interest your money earns. That means you’ll get the full rate (eg 2%) unlike in a normal current or savings account where the average earner would get 20% less interest*.
3. You can pay in more than ever before
The maximum amount a person can put in a NISA is £15,000 for 2014/15 . This is a big jump from old ISAs which were capped at nearly £6,000 before July 1st.
4. You can only have one new NISA each year
You can only open one each financial year. This year ends on 5th April 2015.
5. You can’t keep paying in
It’s not the balance that is capped, it’s the total amount an individual is allowed in a year. So once you hit £15,000, if you withdraw say £2,000, you can’t top it up, meaning £13,000 will be max you can have.
At the end of the year, you allowance resets and you can start saving again.
6. You can open a new one each year
You can either save into an existing account or open another. You can keep doing this each year. There’s still an individual cap for each financial year, no matter how many old ISAs you have.
7. Check interest rates on old ISAs
ISAs from previous years will keep earning interest until you withdraw them. However, rates in ISAs often fall after the first year or when fixes end, so you can transfer them to get better interest rates without using your annual allowance.
Make sure you do this through the proper transfer form. If you withdraw it and then pay it in, you’ll be using part or all of your allowance for that year.
If you have any Stocks & Shares ISAs from previous years, you can now transfer the balance into a Cash NISA.
8. Withdrawing doesn’t mean you then get taxed on the balance
You won’t get taxed on the amount of money you have or the interest you earned. Withdrawing money means that only any interest you subsequently earn on it in your current or savings account will be taxed.
So if you moved £1000 it to a non ISA account paying 3% interest, you’ll only actually get 2.4%. That’s £24 in a year rather than £30.
9. If you’ve already got an ISA for this year, you might need to be quick to top up
Some ISAs let you pay in throughout the year so you’ll be fine to add more when the allowance rises. Others, particularly ones fixed for a few years, are limited to one or two deposits a year so they might only have a small window of time where you can add money.
* Based on annual earnings between £10k and £41,865 in 2014/15