NISAs have found favour with savers, with a record £4.9bn going into cash NISAs in July 2014 according to the British Bankers’ Association.
So what’s changed?
• The annual allowance from 1 July 2014 is £15,000 – a big jump
• More choice – you can put up £15,000 in either a cash NISA or a stocks and shares NISA, or any combination up to the £15,000 limit
• Savers can hold cash and investments within their stocks and shares ISA, so no need for two separate accounts (if the provider allows this)
• More flexibility to earn tax-free interest (with freedom to switch NISA investments – and ISAs from earlier years – from stocks & shares to cash and vice versa, subject to provider terms)
• Junior ISAs – the limit is now £4,000.
With interest rates low, cash NISAs offer enhanced returns because of their tax-free status (a major advantage is that you don’t need to record NISAs on your tax return). For a basic-rate taxpayer, the return in a NISA is worth 25% more because of the tax effect, for higher-rate taxpayers, it is worth 66.6% more.
Stocks and shares NISAs are slightly different. Investments inside a NISA aren’t completely tax-free, but there are advantages:
• No tax on gains. Invest outside an ISA and any profi ts made above the annual capital gains tax exempt amount (£11,000 for 2014-15) would be subject to tax at 18% for basic rate taxpayers and 28% for higher-rate and additional-rate taxpayers.
• Income earned from any share investments is taxed at 10%. So while basic-rate taxpayers would pay the same outside a NISA, this is a significant saving for higher and additional-rate taxpayers who would otherwise pay 32.5% and 37.5% respectively (tax year 2014-2015).
Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual investor