How much can you put in your ISA piggy bank this year?

The annual ISA allowance is set every year by the government. The allowance1 is the maximum amount of new money you can put into a tax efficient ISA during each tax year.2

The ISA allowance for 2012/2013 is £11,280.

The cash ISA limit is £5,640.

The 2013/2014 annual ISA allowance will be based on the previous year’s limit, raised by the rate of CPI inflation as recorded in September the previous year.

In September 2012, the CPI inflation rate was 2.2%.

As a result, the ISA allowance would mathematically be expected to rise to:

£11,280 *102.2 = £11,528

However the allowance is rounded to the nearest £120. This makes it easier to work out monthly contributions for those who are regularly saving into an ISA.

I therefore expect the 2013/2014 allowance to be slightly lower:

Predicted 2013/2014 ISA allowance = £11,520

This will allow maximum monthly contributions of:

£11,520 / 12 = £960

The Junior ISA allowance is expected to be held at £3,600 for the foreseeable future.

All the allowances are confirmed each year by the chancellor during a budget address to the House of Parliament.

The Cash ISA limit versus stocks and shares ISAs

Many people like to use cash ISAs as well as or instead of share ISAs.

Up to 50% of your total ISA allowance can be put into a cash ISA. The 2012/2013 cash ISA allowance is therefore £5,640.

Following on from the maths above, I expect the 2013/2014 cash ISA subscription limit to rise to £5,760.

Here’s a summary:

Full ISA allowance Cash ISA
ISA allowance for 2012/2013 £11,280 £5,640
ISA allowance for 2013/2014* £11,520 £5,760
Junior ISA allowance £3,600 n/a

* Note: 2013 allowance is TBC, estimated on September CPI.

Remember, the total you can put into a stocks and shares ISA in any year is the full allowance minus whatever you will put into a cash ISA that year.

For instance, if you choose to put £2,000 into a cash ISA over the 12 months to 5 April 2013, then you could put £9,280 into a stocks and shares ISA that same tax year.

On the other hand, if you don’t put any money into a cash ISA, then you can use the full annual ISA allowance to shield more of your equities and bonds from tax by moving them into an ISA3.

Note: The ISA allowance is the amount of new money you can put into an ISA over the year. If you already have ISAs with funds in them from previous years, that money doesn’t count towards the new annual ISA limit. Only new money does. This way you’re allowed to build up an ever-bigger ISA pot over time. See HMRC’s ISA FAQ for more details.

How to use your ISA allowance

Only higher rate taxpayers pay tax on share dividends, whereas income from cash, corporate bonds and gilts is taxed for lower rate and higher rate taxpayers alike.

This means most lower rate tax payers owning bonds should put them into an ISA first, and then put dividend paying equities in if they have any spare ISA allowance leftover.

Higher rate taxpayers should put whatever they can into an ISA. You might put your highest yielding shares or bonds into an ISA first, to protect the income they pay from tax. (The effective tax rate on share dividends is lower than on bond income, though, so do your maths carefully).

Even if you’re a lower rate taxpayer and you own no bonds, I’d still put your shares (whether directly owned or held in an index fund or similar) into an ISA wherever you can.

This is to avoid you building up a capital gains tax time bomb, which can really take the shine off selling your shares for a profit in a few years time!

What’s more, you might become a higher rate taxpayer in the future, and then pay tax on share income, too.

Shielding your investment returns from tax can make a huge difference to your end result in the long run.

2013/2014 ISA allowance and CPI inflation

The ISA allowance only began going up with inflation in March 2010, when the government raised the annual allowance by £3,000 to £10,200 for the 2010-2011 tax year.

At the same time, the then-chancellor Alistair Darling also announced the annual ISA allowance would go up every year by the RPI inflation rate in September of the prior year, rounded to the nearest £120.

However no government seems to like allowing us to pay less tax, especially in times of austerity. Accordingly, chancellor George Osborne later changed the guidelines so that annual ISA subscription limits would be raised by the CPI inflation rate, which is typically lower than the RPI inflation measure.

Monthly savings into an ISA

Rounding to the nearest £120 is designed to make it easier for us to set up monthly savings.

Dividing the 2012 ISA allowance by 12 months, for example, gives us a saving target of £940 a month, which is quite a substantial amount for most people to save from their earnings.

One way to use it up is to sell any non-ISA-d investments that you own that can be moved into an ISA. I’ve been doing this for years, having foolishly not bothered with ISAs (or their predecessors, PEPs) in my early years of saving.

If you’re thinking about funding your 2012 ISA allowance with share sales, then read my article about defusing capital gains tax on shares for some pointers on how best to sell.

  1. Also known by the government but to nobody else as the subscription limit.
  2. The tax year runs from 6 April to 5 April the following year.
  3. Note that when I speak of moving shares and bonds into an ISA here (and in the rest of the article) I mean selling them, putting the money raised into an ISA, and then repurchasing. Unfortunately you cannot transfer shareholdings into an ISA directly to avoid these transaction costs.

Further reading:

  1. The 2012 ISA allowance
  2. Annual ISA allowance goes up to £7,200 a year
  3. Why I’m celebrating the annual ISA limit being raised to £10,200

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