How to fill your ISA for free

Cliff D'Arcy
by Lovemoney Staff Cliff D'Arcy on 10 April 2010  |  Comments 8 comments

Want a new tax-free ISA account? Here's how to grab one without stumping up extra cash!

How to fill your ISA for free

The Individual Savings Account (ISA) is the favourite tax shelter of UK savers and investors.

In the 2008/09 tax year, UK residents opened 14.2 million new ISAs: 11.3 million cash ISAs and 2.9 million stocks and shares ISAs. The attractions of ISAs are obvious:

  • Any UK resident aged 16+ can open a cash ISA; for shares ISAs, the minimum age is 18.
  • Each tax year, you can contribute up to £5,100 into a cash ISA, plus the same amount into a shares ISA, for a total of £10,200 (and double this for couples).
  • If you don’t put anything into a cash ISA, then you can put the maximum £10,200 into a shares ISA.
  • Any interest you earn inside a cash ISA is complete free of tax, making it superior to an otherwise identical taxable savings account.
  • Any capital gains (profits) made inside shares ISAs are tax free, as are any dividends (the income from shares) received. However, you cannot reclaim the 10% tax credit notionally attached to dividends.

In short, ISAs are a very tax-efficient way of saving and investing -- and every adult with spare cash should have one. ISAs have been around since 1999 and anyone making full use of their yearly ISA allowances could today have £100,000+ safely stashed away from the taxman.

Funding a cash ISA

The simplest way to fund a new cash ISA is to open a 2010/11 ISA right now and then deposit as much money as you can afford, either in one go or each month -- after shopping around for the highest rates, of course.

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However, if you don’t have any spare cash, then the next best thing is to use existing cash savings. In other words, you can withdraw funds from an existing savings account and pop this money inside a shiny, new ISA tax wrapper.

By doing this, you money moves from a taxed to a tax-free savings account, which boosts your interest. For example, 3% interest in a tax-free ISA is equal to 3.75% interest for basic-rate (20%) taxpayers. For higher-rate taxpayers, 3% untaxed is worth 5% taxed, which is a big boost.

Here’s another tip: when sorting out a new ISA, don’t forget about your existing ISAs. A recent review found that most cash ISAs pay yearly interest of 0.1% to 0.5%, which is rubbish. Thus, arrange to transfer your ISA cash from existing providers to a Best Buy account which accepts ISA transfers. By doing so, you could boost your tax-free interest rate to between 3% and 5% a year.

For example, I recently helped a couple of readers to grab higher rates by transferring their cash ISAs to Best Buy accounts. In their existing ISAs, they had built up £35,000, but this was earning around 0.4% a year. Thus, their tax-free ISA income was a measly £140 a year.

After consulting the Best Buy tables, they opted to move to a five-year, fixed-rate ISA paying 5% a year. This boosts their tax-free interest to £1,750 a year, leaving them £1,610 a year better off. It’s as easy as that!

Funding a shares ISA

Although these are referred to as ‘stocks and shares’ ISAs, investors can use them to shelter a wide variety of investments from the taxman. These include shares in individual companies (in a ‘self-select ISA’), corporate bonds (IOUs issued by companies that pay a fixed rate of interest) and funds such as index trackers, unit trusts, OEICs (open-ended investment companies) and exchange-traded funds (ETFs).

If you have plenty of cash squirreled away, then the easiest thing is to deposit this cash inside a shares ISA and then use it to buy investments which take your fancy.

Find out the easy way to invest your ISA and beat the returns on cash

However, you don’t need fresh cash to fund a new shares ISA. Although you can’t transfer shares straight into an ISA, you can do something sneaky which is called ‘Bed and ISA’. This involves your ISA manager selling your existing investments and then buying them back inside an ISA.

Why bother doing this?

First, it allows you to save future taxes on existing investments by sheltering them inside a tax-free wrapper. Second, it enables you to ‘crystallise’ existing capital gains (or losses), thus using up part of your yearly capital gains tax allowance. (The CGT allowance for 2010/10 is £10,100.)

However, there may be costs involved in a Bed and ISA transaction, such as:

  • Two lots of share-dealing charges: for selling your shares and buying them back inside an ISA. Then again, do shop around, as some ISA managers offer commission-free Bed and ISAs.
  • Stamp duty of 0.5% of the value of shares bought inside the ISA (£1 for every £200 invested).
  • The ‘bid-offer spread’, which is the difference between the (lower) selling price and the (higher) buying price of the shares. However, given that you are both buyer and seller, your ISA manager should be able to negotiate a minimal spread with the market-makers who trade shares.
  • Once your shares are inside an ISA, you may be charged monthly, quarterly or yearly management fees and/or inactivity fees. Therefore, carefully check all charges before opening a shares ISA.
  • You cannot transfer shares quoted on AIM (the Alternative Investment Market) into a shares ISA, although this rule is to be reviewed.

Finally, you can switch savings built up inside a cash ISA into a stocks and shares ISA, but not the other way around. This could be useful for investors looking to boost their tax-free income by moving into high-yielding shares or corporate bonds However, this higher income comes at far greater risk, so please do your homework before switching!

Get help from

If you have any questions about tax-free saving, then ask other readers for help via Q&A. Also, to save as much as you can, join our Build up your savings goal.

Compare ISAs at

More: Find your ideal ISA | How your vote could make you richer | Don't fall for this lie about ISAs

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Comments (8)

  • hoftst
    Love rating 0
    hoftst said

    catwoman ;-) - If Santander are so bad, just leave them!

    You can search and apply for a new ISA online and once it is up and running the new provider can arrange to transfer your old ISA within a month! No need to queue. You just need to check that your new ISA allows 'transfers in' and you haven't actuallly added any money to your old ISA this financial year. 

    I've just done exactly this with Nationwide e-ISA, which offer 2.75 to Jun 2011 - they do ask that you open a 'card' account too (see their website), but others may not.


    Report on 12 April 2010  |  Love thisLove  0 loves
  • steelie68
    Love rating 1
    steelie68 said

    For those with an Easy Isa, or any Isa currently on a low rate with Santander who are struggling to get an appointment, do yourselves a favour and request an In Branch Internal Isa Transfer form, which is really simple to fill out. It gives the options of a Direct Isa at 2.75% on 9k and above, and is run by internet, Post and Cash Machine or a 2 Year Postal Isa Fixed at 3.50%. These transfers are done in branches and are quick and easy. Should you choose the Direct Isa and like counter access then do yourselves an even bigger favour by taking out a card account, which offers a debit card so that you can add the Direct Isa onto the card making transfers to a branch counter accessable account easy. If you are a rate chaser like me, then the 5% offered on the card account is really mouthwatering and I had no hesitation turning my back on my previous current account and switching. The problem with variable rates is that they do go up and down, and a lot of people are not getting great rates through their own sheer financial lethargy. Check your account rates at least every 6 months and if you can't be bothered then don't blame the banks!

    Report on 16 April 2010  |  Love thisLove  1 love

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