Individual Savings
Accounts

What is an ISA?

ISA stands for Individual Savings Account. If you’re a tax payer earning over £22,560 per year, at least 20% of interest you earn from savings accounts is taxed - 10% if you earn below £22,560; 40% if you earn more than £35,001; and 50% if you earn over £150,000. The only relief you get from this deduction is by opening an ISA that provides tax free returns, allowing you to add a maximum of £10,680 every tax year spread between cash and investment ISAs.

There are two types of ISAs: cash ISAs, and stocks and shares ISAs. Savers are able to invest in two different ISAs in any one tax year: one cash ISA and one stocks and shares ISA.

You can invest up to £10,680 per tax year (6 April to 5 April the following year) which can either be invested entirely into Investment/Stocks & Shares ISAs; spread between the two ISA types, with a maximum of £5,340 per year into a cash ISA, or a combination of the two.

ISAs are a great way to make your savings work harder for you, and the best part is that you pay no tax on any of the income you receive from your ISA savings and investments. This includes dividends, interest and bonuses.

In the past many people found ISAs confusing as the regulations behind them were unclear. However, as of 6th April 2008 they have been simplified, so now there is really no excuse not to take advantage of these great savings accounts.

ISA Managers

ISA managers (banks and building societies) must be authorised by the Financial Services Authority and approved by HM Revenue & Customs.

This means that you will have access to complaints procedures, the Financial Ombudsman Scheme and the Financial Services Compensation Scheme if you were to experience any problems.

To find out if an ISA manager is authorised by the FSA phone their Consumer Helpline on 0845 606 1234

How can I make the most of this fantastic scheme?

Each tax year everyone aged 16 or over is given a new ISA allowance. If you don't use it, you lose it. If you do invest in an ISA you can keep your money in there, tax-free for as long as you like.

The maximum amount you can invest in cash ISAs is £5,340 per year, regardless of whether you hold a stocks and shares ISA. However, you can use up your full £10,680 yearly allowance to invest in a stocks and shares ISA alone.

For example, an individual saves £1,000 in a cash ISA at the start of the tax year. In the same tax year they could invest another £9,680 in ISAs. This could be made up of £4,340 in the same cash ISA and the remaining £5,340 in a stocks and shares ISA, or up to £9,680 in a stocks and shares ISA.

When opening cash or stocks and shares ISAs you are only eligible to make investments with a single provider (per account) in any one tax year. It is possible to hold both a cash and stocks and shares ISA with the same provider.

Most banks and building societies offer a wide variety of cash ISAs. These operate in a similar manner to taxable savings accounts offering fixed term and instant access accounts. Cash ISAs are most suited to savers looking for secure returns.

Stocks and shares ISAs are more suitable for people looking to invest over longer periods of time. Rather than earning money from accumulating tax free interest, stocks and shares ISAs involve an element of risk as returns depend on the performance of the stock you invest in. However, if you do some research you may find that your stocks and shares end up being more profitable than your cash ISA.

Transferring your ISA

You can transfer cash and stocks and shares ISAs between providers, although you must remember to do this by requesting a transfer rather than by withdrawing the money.

Check the terms and conditions with your ISA manager to find out if you will be charged for transferring.
You are able to transfer some or all of the money saved in previous tax years without affecting your annual ISA investment allowance.

As of the 6th April 2008, you are able to transfer investments held as cash from previous years allowances as well as your current year’s cash allowance into stocks and shares with the tax-free benefits. However, you cannot transfer a stocks and shares ISA into a cash ISA.

What level of protection is provided?

Cash ISAs carry the same level of protection as that applied to normal savings accounts, so if your ISA provider was to fall into difficulties and your money was lost, the Financial Services Compensation Scheme (FSCS) would protect your savings for up to £85,000, or for any non-UK providers see the compensation levels provided in our top ten saving tips

Stocks and shares ISAs come with risk, so a different level of FSCS protection applies under a set of conditions that you must be aware of before investing.

Your money will be covered if the product provider of the investment was to go bust, for example a bank providing a shares ISA, but if you have shares in a company that went bust, or the company performed badly, then you are not protected as this is the risk element that applies when making an investment.

However in the case of buying shares or funds through a company, for example, buying shares from a stockbroker, if the stockbroker were to go bust you would still own your shares, so you would not be compensated as you would not have lost out.

What to remember

An important thing to understand is that you can only ever deposit up to £10,680 in cash & stocks and shares ISAs within one tax year, regardless of what you may have withdrawn throughout the year, so if possible try to avoid eating into your ISAs.

When transferring ISAs make sure you let the new provider arrange the transfer. You cannot simply close the first ISA and pay the money into another ISA.

Although you are restricted to £10,680 of investments per year, any savings from past years will still provide you with tax free interest.

For example, an individual has a total of £20,000 saved in cash ISAs from previous tax years. They plan to invest their full current years cash ISA allowance of £5,340 into the same account. They will then be earning tax free interest from the full £25,340. They can then continue to add to this account over coming years, or choose to transfer their existing savings over to a different provider.

The main thing to remember is that these accounts provide you with a tax free haven, allowing you to earn interest and returns while paying absolutely nothing to the tax man!