Did you blink? The last financial year comes to an end at the close of trade today (Thursday, 5th April) and if you still have an allowance in your 2011/2012 ISA, now is the time to be sending those Faster Payments or internal transfers to it. Any transfers that clear after the close of business today will not count!

If you are unsure of when your ISA provider closes, give them a very quick call!

See my feature article A Guide To: Individual Savings Accounts.

Your Cash ISA allowance for this year is £5,340, and rising to £5,640 as of tomorrow (2012/2013). If you’re short of that figure, be sure to take advantage of the tax-free savings an ISA can bring. Do remember though that if you have taken money out of your ISA you can’t put it back. If you have raided that particular piggy-bank, you will need to calculate what your remaining allowance is.

For the numerically challenged (I include myself in that statement), this can be easily worked out as follows:

£5,340. Minus whatever you have put into your ISA, regardless of whatever you have taken out.

Whatever is left, will be your remaining allowance (if anything).

I’ve seen some weird and wonderfully confusing sums to perform for this same calculation but that really is the simplest way of doing it without getting overly fancy about the whole thing. The bottom line is you can put in to an ISA, and you can take out what you’ve put in, but you can’t then put back whatever you have taken out. It’s a one-way savings account.

Your Stocks and Shares ISA allowance is also £5,340 and will close at the same time, using the same rules. The 2012/2013 total allowance will rise in total from £10,680 to £11,280.

Be sure to shop around for next year’s ISA – do not automatically assume the one you have is the best out there. Shop around, and look for the best interest rates, no management fees (unless the rate offered significantly trumps those fees), and make sure transfers in are permitted to take the most advantage of the given rate.

Happy Tax Free Saving!

Paying tax may be something that we all have to do, and there might not be any way to get out of it, but there’s no reason to pay more than you absolutely have to. Take your savings account as an example: chances are that if you’re over 18 and not a student, you’ll be paying tax on the interest you earn on your savings. If you have investments, you’ll most likely have to pay tax on the dividends you earn, right?

However, there are also some interesting investments that you can make that help you to beat the tax man, perfectly legally. Probably the best known, and one of the most popular examples of this, is the stocks and shares ISA. Let’s find out more… 

ISA Investment – The Basics

Many people are already familiar with how a shares ISA works, but here’s a quick overview just in case. Essentially, ISAs offer you a tax-free form of savings. This means that you don’t have to pay tax on any interest or dividends you earn through your investment ISA. This means you maximise your investment and make sure your money is working is hard as it possibly can.

There are a couple of things to note when it comes to shares ISAs: there is an annual investment limit, which means you can only put a certain amount of money into your ISA in a single tax year. The current ISA allowance for 2011/2012 is £10680. You can choose to invest all of this in your shares ISA or split it and put half into a cash ISA instead – it’s up to you.

It’s also worth knowing that there are quite a few different shares ISAs around, from climate change ISAs (investing in companies that have lighter than average carbon footprints) to FTSE tracker ISAs, so it’s worth looking around to see which one would be best for you.

A good option, for many reasons…

But why should you consider investing in a shares ISA? There are lots of reasons you might want to invest your money, my friend Jason started an investment ISA after receiving some money from his family. His parents had downsized their property and, very kindly, passed some of the money they made on the sale down to their son with the aim of helping him get on the property ladder.

Of course, the property market being what it is, even his parents’ generous donation plus what he’d already saved couldn’t finance his mortgage deposit, so he decided to take the chance and go for an ISA with the aim of maximising his investment and eventually raising a deposit. In this case, he chose a FTSE all-share tracker ISA, which invests in all of the companies listed on that index.

Why that ISA? Essentially, he didn’t want to put all his eggs in one basket and was fairly new to investing so spreading the risk over a large number of companies seemed prudent. There were other options, but based on his situation and goals, he decided that one was best for him.

That’s not the only reason people consider investing in ISAs, though. You might come into money due to a competition win, a bonus from work, your own house sale or inheritance. You might be saving for a car, a holiday, your kids’ education, a rainy day… The important thing is making sure you choose the right ISA for your needs.

 Is the risk worth it?

As you probably know, there is a risk attached to shares ISAs. This is because they are investments and, like any investments, they aren’t guaranteed to grow. This means it’s a good idea to evaluate the risk before taking the plunge and do some research into different ISAs to make sure you get one with a good reputation. We can’t deny that some ISAs do underperform; however, the best stocks and shares ISAs are careful about where they invest and even though the economy has seen its ups and downs of late, there are still some very good ISA success stories around.

Also, if you invest wisely, it is possible to spread the risk and limit your chances of an unfortunate investment. For example, there are bonds and gilts ISAs available, which are still investments but are lower in risk than other ISAs attached to the stock market. You could alternatively split your money between a cash ISA and a share ISA, or put some into a regular savings account so you’re limiting how much is at stake.

Plus, there is a risk in not moving your money. It’s said that people are more likely to get divorced than they are to move their bank accounts, and millions of people end up leaving their money in savings accounts where the value is actually going down due to inflation and low interest rates. There might be a risk involved with shares ISAs, but there’s still a good chance your money will grow, unlike many current and saving accounts – and if you look at the performance of many ISAs over the past three years, it’s easy to see that even in challenging circumstances, it’s still possible for significant gains to be made.

Deciding between an ISA and a Regular Savings Account – what should you do?

When comparing an ISA and a regular savings account there is one main benefit that an ISA can offer you and that benefit is that you don’t pay any tax on the interest that you earn!

But how does this work in practice?

The best regular saving accounts available offer the highest rates of interest. If you were basing your decision entirely on the interest rate on offer then a regular savings account may appear to offer a better value than an ISA. However, as with all non-ISA accounts, the interest you earn will be taxed. If you were to save your money in an ISA account the interest would be tax free.

Although the headline interest rate on an ISA may be lower than a standard savings account – because it is tax free – you still get to make more money overall.

Regular Savings Accounts (in this respect I mean ‘you have to put money in every month’) have catchy interest rates, but there are plenty of other catches. You have to put money into the account regularly, which may not always be possible. You cannot put in a lump sum to start with either and the maximum amount you can deposit each year is also kept relatively low. Interest is often only paid after the full 12 months and it’s not always easy to withdraw your money from regular savings accounts; with some accounts you must give a few months notice, and with others you can’t withdraw your money during the first 12 months at all.

Generally, an ISA comes with no such restrictions. See my A Guide To: Individual Savings Accounts for more information on particular points to note about ISAs.

If you do not like the idea of having your money locked away then you might find it easier to open a cash ISA account. Cash ISAs are tax-free, which makes them an attractive option to many people. Although you can get some regular saver cash ISAs amongst other types of Cash ISA, most are easy access meaning you can transfer money out whenever you need it.

Like regular savings accounts you can still only deposit a fixed amount per year, but the two main advantages are that you can add the same amount each year and you can do it as a lump sum if you find it easier, so you benefit from the interest on the whole lot for a full year. Also, unlike regular savings accounts the money isn’t transferred to an account with a worse interest rate after a year, although you should keep an eye on rates to make sure yours is still competitive.

Overall easy access or regular savings accounts are like easy access cash ISAs, except you pay tax. The interest rates are similar to ISAs, which means after tax you do in fact lose out.

The number of reasons to invest in a cash ISA rather than a regular savings account are growing all the time. Currently most adults save up to £7,200 in ISAs every year. The whole amount can be invested in a stocks and shares ISA or you could split it and put up to £3,600 in a cash ISA. In October 2009 everybody aged 50 or over was allowed a higher annual limit of £10,200, of which up to half can be saved as cash. In order to take advantage of this, you will need to be 50 on or before April 5 this year, to benefit in the current year. On April the 6th 2010 this is set to change; the limit will be increased to the same amount for everybody, regardless of age.

Interest rates are up and down in the current financial climate which means that some savers could benefit from changing who they bank with. Changing account providers for an ISA account is not quite as easy as switching a standard savings account as once the money is taken out of the account, the holder loses all the tax benefits they would have had. This can be prevented by insuring that your old provider and new provider pass on all the information about your account history.

It is worth comparing providers before deciding to open a Cash ISA as the (remember: tax free!) interest rate can make a dramatic difference to the amount you save.