A NISA way to save tax-free

There was a welcome boost for savers in this year’s Budget, thanks to a loosening of the rules governing Individual Savings Accounts (ISAs) and a significant increase in the amount of money people can save tax-free.

All adult savers receive an annual allowance for every tax year which they can invest in an ISA without giving up any interest to the taxman.

Currently up to £5,940 can be put into a cash ISA and the limit for a stocks and shares ISA is £11,880. Savers can hold a combination of both products, but the total amount invested must not exceed £11,880.

But in his shake up of the ISA market, the Chancellor confirmed that a revised limit of £15,000 will apply from 1 July 2014. Moreover this maximum allowance can be used in full in a cash ISA, as well as a stocks and shares ISA or through a combined investment.

There is also greater flexibility – for the first time savers will be able to transfer funds from their stocks and shares ISA into a cash ISA, which is handy if they feel more comfortable investing in an account such as a fixed rate cash ISA that pays a guaranteed return.

The changes have been welcomed by local building society the West Brom, which offers both types of ISA through its network of 37 branches.

Head of products David Taylor said: “ISAs should be part of everyone’s saving plans because of their tax-free status. The increased limits on how much you can deposit will make them even more attractive.

“Bigger allowances and the ability to transfer more easily between products is something the industry has been demanding for some time and we are pleased the Government has responded.”

Nevertheless there is still some confusion over how the new ISAs, or NISAs as they have been labelled, will work. This is not helped by the fact that the increased limit starts in July, after the latest tax year has begun.

David said: “The big question is how accommodating banks and building societies will be. Take a one year fixed rate cash NISA as an example. If a saver opens a new one now using their full allowance of £5,940 they could miss out on utilising the £15,000 limit, because technically only one initial deposit is accepted.

“What the West Brom is saying to its customers with fixed rate NISAs opened in this new tax year is that they can make additional deposits once the new limit kicks in for a period of up to three months. That way they get the full tax-free benefit.”

Few would argue that savers have had a tough time since the financial crisis because of the fall in interest rates. It is hoped the advent of NISAs and more generous tax breaks will finally give them something to celebrate.