Individual Savings Accounts (ISAs)

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Individual Savings Accounts (ISAs)

Individual savings accounts (ISAs) are basically a tax-free wrapper for savings and investment products.

Individuals can store up to £7,200 in a single tax year to April without having to pay any tax on their returns. Under current laws, gains on investments held outside an ISA are liable to income tax or capital gains tax, with basic rate tax payers having to pay 20% tax and high rate payers subject to 40% tax.

The interest rates for cash ISAs are more generous than for many equivalent non-ISA accounts.

Changes to ISAs

Changes to ISAs were introduced on April 6 2008 and as a result the original mini, maxi and Tessa-only ISAS were abolished. There are now just two types of ISA accounts available to customers:

Cash ISA
Cash ISAs are a safe option for short-term savings. They work in the same manner as any other savings account but are tax-free.

Many cash ISAs are easy access accounts with no withdrawal restrictions so customers can get at their money 24/7. Cash ISAs can also come in the form of easy fixed rate and notice accounts

Stocks and Shares ISA
Stocks and Shares ISAs are more risky and need to be invested in for longer periods of time. Various non-cash assets can be held within a stocks and shares ISA, including unit trusts, shares, bonds, open ended investment companies, and life insurance policies.

How Much Can be Invested?

Customers can open one cash ISA and one stocks and shares ISA each tax year. Up to £3,600 can be invested in a cash ISA, whilst the remainder of the £7,200 allowance can be invested in a stocks and shares ISA, or the full amount can be invested in a stocks and shares ISA.

Transferring Money

As a result of the rule changes, savers who initially invested in cash ISA can transfer that money into a stocks and shares account. However, moving from equities into cash is not possible.

Money can also be moved from one cash ISA to another without losing the tax-free status. However, customers need to make sure the transaction is treated as a transfer and not a closure of the account as the latter will be classed as a withdrawal and result in customers losing their tax-break on those funds. Therefore, in order to reap the full benefits of an ISA, savings should be invested in it for as long as possible and any other savings should be used first.

It is worth noting that some cash ISAs, such as, notice accounts, restrict withdrawals. Fixed rate ISAs do not allow customers access to their money during the fixed-rate term.

Additionally, customers who find that the rate they receive starts becoming uncompetitive can transfer their funds to another provider.