Individual Savings Accounts (ISAs)

What is an ISA?

ISA stands for individual savings account. They were introduced in April 1999 and replaced Tessas and Peps. They are effectively a tax wrapper within which you can hold a range of different investments. The big advantage of ISAs is that returns are tax-free – gains on investments held outside an ISA are liable to income tax or capital gains tax.

ISAs offer a generous tax break but millions of savers fail to make use of their annual allowance.

Why should I set up an ISA?

ISAs remain one of the most beneficial savings plans because they are so tax-efficient. Basic-rate taxpayers who are usually taxed at 20% on interest earned on savings accounts do not pay any tax on interest earned on a cash ISA. If you're a higher-rate taxpayer, you'll make bigger savings, as you would otherwise face a 40% bill.

Importantly, investments held within an ISA are exempt from capital gains tax, so any growth is yours to keep.

How do I set an ISA up?

We can help you decide which ISA is best suited to your needs, based on your individual circumstances and ‘risk profile’.

Please contact us for a personalised illustration.

What types of ISA are available?

You can open one cash ISA and one stocks and shares ISA each tax year.

A cash ISA is basically a bank or building society account, and so is inherently low risk and ideally suited to short-term or 'emergency' savings. It is a savings account that enables you to earn interest tax-free; you'll get back the sum you initially invested, plus any interest earned.

The second type of ISA is a stocks and shares ISA, also known as an equity ISA. It can be invested in a variety of investment funds, or individual stocks and shares, as well as fixed-interest investments such as corporate bonds. This type of ISA carries more risk because your return is not guaranteed and you may even lose money.

Over the long term however, equities tend to outperform cash and bonds. They also tend to be more volatile so if you are investing for less than five years, or are a cautious investor, it may be best that you stick with cash as its value cannot fall.

What are the yearly limits?

Savers under the age of 50 can invest up to 7,200 in a single tax year – the over-50s can invest up to 10,200. This was announced in the 2009 Budget and the over-50s will be able to invest their extra allowance from October 6th 2009. This higher limit will apply to all savers from April 6th 2010. The tax year runs from April 6th to April 5th and it is important to use as much of your annual allowance as you can within that time as it cannot be carried over into the next financial year.

Once you've invested your annual limit, you cannot pay more in, even if you have made a withdrawal.

For example, if you pay in the full allowance 7,200 but take out 500 the next month, you can't put that 500 back in your ISA in the same tax year because, although your ISA holding might be below the limit, you've already used your annual allowance.

You can invest new money; either by lump sum or setting up a regular savings plan to invest a little each month.

Can I move money between equity and cash ISAs?

You can now transfer money from a cash ISA into a stocks and shares ISA.

However, it does not work in reverse and you cannot move your money from a stocks and shares ISA back into a cash ISA.


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