Cash ISA Yearly Allowance

Every year, you are allowed to put up to the limit, whatever it is, into a cash ISA, and the interest is then tax free. This current year the limit is £3000, for 2008-09 it will be £3600. Once you have invested the maximim in any tax year, no further deposits are allowed so, if you withdraw any money, you cannot replenish it. The tax shelter lasts for as long as you leave the money in the ISA. If you never touch it, it will accumulate over the years.

Obviously, to get the full benefit of the tax break, it pays you to invest early in the tax year, so that is what you should do. But then, you shouldn't have any money mouldering away in lower rate savings accounts anyway. It should be mouldering away in higher rate savings accounts which actually offer high gross rates of interest (before tax) than any ISA.

That's a most unfortunate misunderstanding. I blame the education system. How can you not know that "per year" means "every year"?

Ah! Yet further evidence that you have sustained damage from the education system. Why else would you put a question mark at the end of a sentence which isn't a question? [sorry] :-)

But the answer to the question you didn't ask is Yes.

The answer to the question you didn't ask is No, not necessarily. I think most banks give the full interest rate even just for short-term holdings. Of course the rate is "per year", so if you put money in for only half a year, you only get half the interest even if the *interest rate* is the same.

If you have cashflow needs whereby you wish to withdraw the interest regularly, then any change in when interest is paid can mess up your schedule. Apart from that, and assuming you don't need to give notice of withdrawal from your lower rate accounts, the optimum time is ASAP.

If you do need to give notice, then it may be simplest just to give the notice ASAP, and then wait for it to expire. Otherwise you might lose more in the "penalty charge" than you gain in the slightly higher rate. But if the notice period would straddle the deadline for taking advantage of one year's contribution, then, well, it may be worth taking the penalty. But as you've already fully subscribed for this year, this doesn't apply to you now.

I think he meant "lower rate" only in the sense of having a rate lower than he could get in an ISA. Even "higher rate" accounts could be described as "lower rate" if they give a rate which *after tax* is lower than a typical ISA's.

Incidentally, last time I looked most ISAs paid a lower rate than the gross rate offered by most "higher rate" accounts, and so ISAs are generally not a good thing for non-taxpayers to go in for.

I suppose that this phenomenon is similar to the 'stamp duty' effect, i.e. whilst stamp duty is nominally levied on the property buyer, it is effectively shared about 50:50 between buyer and seller, through a suitably discounted headline price. (ISTM it surely must be so in an efficient market, if supply and demand are balances by the price mechanism)

In the case of the cash ISA, the tax relief is nominally for the benefit of the saver, but supply and demand re-balance such that, indirectly, the provider swipes about half of the tax relief for itself (by way of a gross rate which is less generous than for the equivalent taxable account).

It's not a problem with the stocks-and-shares ISAs, due to the proper distinction between the wrapper and the underlying investment. We need something similar for cash investments, perhaps.