Is it worth opening a cash ISA at the end of the tax year?

It’s nearly the end of the tax year. Should I open an ISA?

In just a month, the 2013/2014 tax year will end, so if you’ve been thinking of starting a savings account, now’s the time– and a cash ISA could be the perfect way to do it. However, if talk of ISAs leaves you confused, read our guide and – hopefully – everything should become clearer.

What is an ISA?

An ISA, or Individual Savings Account, is an account you can save your money in and gain interest on – without it being taxed. There are certain restrictions (which we’ll come to), but generally speaking they are the best savings accounts available, because you’re not losing any of your money or interest in tax.

There are two main types of ISA available – cash and stocks and shares. You could look at it as one account split into two: the first half is cash and the second half investment. You can choose to use the whole thing for investments, but you’re only entitled to half the available allowance as cash-only.

You’ve lost me…

Every tax year, UK residents are entitled to open one ISA with their choice of provider, and they’re also entitled to the same tax-free allowance. This means that during that tax year, you can save up to that allowance and the money you put away – as well as the interest you earn – won’t be taxed.

You’re not allowed to pay more than the allowance into the ISA – and if you withdraw money from it, you can’t put it back in if doing so will take you over that allowance.

Here’s an example:

Your cash ISA allowance is £5,760.

You pay in £4,000.

You’re entitled to save a further £1,760 in cash.

You withdraw £2,000.

You’re still only entitled to save £1,760 – not £3,760.

Does this mean I can’t withdraw my money?

No! Many ISAs allow you to withdraw your cash anytime you need to, so if you have an emergency, like your car breaking down, you can get the money you need to sort it. However, you are only allowed to pay in up to your allowance for that tax year and nothing over that limit – regardless of whether the funds in your account are below that sum because you’ve withdrawn some.

What’s the ISA limit?

For the 2013/2014 tax year, which ends on April 5th, your tax-free allowance for a cash ISA is £5,760, and your total allowance (for cash plus stocks and shares or stocks and shares only) is £11,520.

As of the 2014/2015 tax year, your tax-free allowance for a cash ISA will be £5,940, and your total allowance (for cash plus stocks and shares or stocks and shares only) will be £11,880.

Cash or stocks and shares ISA – which should I choose?

As mentioned earlier, you basically have three options when you open an ISA: open a cash ISA only, save half your total allowance in cash and invest the rest in stocks and shares, or invest your total allowance in stocks and shares.

Stocks and shares ISAs are tax-efficient, meaning you won’t be taxed on the profits you make. You can invest in different products, including bonds, funds and shares, and your account will be managed for you. However, as with any type of investment, putting your money in a stocks and shares ISA does carry a risk.

And so we come back to our first question:

Should I bother opening an ISA when it’s nearly the end of the tax year?

Yes! If you have the money to save, it’s well worth opening an ISA even though the tax year ends in a few weeks. Let’s say you’ve recently come into a lump sum of £10,000, perhaps as the result of an inheritance or a property sale. You can open a cash ISA before April 5th and save £5,760. Then, at the start of the new tax year, you can open another cash ISA and invest the £4,240 you have leftover. You’ll be able to save the remaining £1,700 of your allowance over the course of the rest of the 2014/2015 tax year.

Of course, you don’t have to open an ISA and pay the TOTAL allowance in. Even if you just have around £100 tucked away in a savings account, it’s worth opening an ISA and moving the money there so you can enjoy the tax-free allowance.

How you decide to save and invest your money is a choice only you can make, but we hope we’ve made the subject of ISAs a little clearer.