As from the 6th April 2010 the new ISA rules and allowances have come into effect meaning everyone over the age of 16 resident in the UK for tax purposes can now save more tax efficiently. 

How much can I invest in an ISA?

The current limit (2010-2011) is set at £10,200 of which up to half can be invested into a Cash ISA leaving £5100 which can be invested into Stocks and Shares ISAs. Alternatively you can use the whole allowance for Shares. You can of course use a lower amount in cash and put the difference up to the maximum allowance into shares. 

If you don’t use your allowance by the 5^th of April in the relevant tax year the unused allowances do not roll over and you lose them for good. It also makes sense to use your allowance at the beginning of the tax year and not the end, to get a whole years worth of extra tax free growth or interest.

How many ISAs can I have?

You can open one Cash ISA and/or one Share ISA in any tax year, provided you do not exceed your annual allowance.

What happened to Mini and Maxi ISAs?

Thankfully all those complicated rules have now ceased and the investment rules have been simplified to allow you to use your annual allowance as you see fit.

Can I change my ISA provider?

You can transfer previous years Cash or Stocks and Shares ISAs to another provider. Obviously, do not withdraw the money out or the ISA allowance will be lost, but instead fill out a transfer form and your new provider will sort it out. If you are in the habit of regularly transferring Share ISAs, you should consider a Wrap account or fund supermarket as the cost of transfers will be much lower. 

Should I always use an ISA?

For Cash ISAs, the answer is almost always yes as tax is not levied on the interest you receive. For Shares ISAs, be more careful as this is not always the case. In many circumstances especially for saving towards retirement pensions may be more tax efficient and pensions offer a wider range of investment choice. In retirement or if you are seriously ill you should also consider Inheritance tax as ISAs fall into your estate on death. There is no point making a small amount tax efficiently only to have your children pay out 40% to the taxman on your death. 

That being said using an ISA allowance every year can mean you build up a large amount of tax efficient investments over the years. For Cash ISAs the tax efficient growth is well worthwhile and in many cases you can obtain higher rates than most deposit accounts. For Shares ISAs, to my mind it’s not the tax efficient growth that is important as much as the fact that a tax free income can be produced from the investment for many years. This is especially useful for people who are likely to be higher rate tax payers in retirement. However if you do use the allowance every year be sure to diversify your investments properly. 

Good independent financial advice and a proactively managed portfolio is essential.