What is an ISA (or NISA)?
An ISA - or individual savings account - allows UK residents over the age of 16 to invest a certain amount tax free every year. Once you have invested funds into an ISA, they remain tax-free unless you decide to withdraw them.
In July 2014, the new super ISA (NISA) was launched, offering savers much more flexibility over their tax-free allowance).
How Savings Are Taxed:
The interest on savings is classed as income and is therefore subject to tax. The starting tax rate for savings is 10%. If your earnings are below your Personal Allowance plus £2,880 (the 10% starting rate limit for savings income in 2014/2015), then some or all of your savings income will be taxable at 10%.
Any interest earned on savings which, included with other income, falls between £2,880 and £31,865, is taxed at the basic rate of 20%. When income falls between £31,865 and £150,000, interest is taxed at 40%. When income exceeds £150,000, interest is taxed at 45%.
If you're on low income, you may be able to claim exemption from savings tax by completing an R85 form at your bank. But you will also find relief from tax through an ISA.
Types of ISA / How to Invest:
There are two different types of ISA: cash ISAs, and stocks / growth / investment ISAs.
Cash ISAs operate in the same way as traditional savings accounts. You'll normally find a range of instant-access options and fixed rate options. Consider whether you might need access to your funds before you decide to lock them away for long periods at a time.
Stock ISAs tend to involve an element of risk. Variable returns are dependent on the performance of stocks. However, with careful negotiation, stocks and shares ISAs could end up yielding more than cash ISAs.
Savers are able to invest into one cash ISA and one investment ISA in a single tax year.
From July 2014, new regulations allow savers to invest in any combination of cash or stocks up to the maximum limit. This means that you can now invest the entire allowance in cash.
Once the full £15,000 has been invested, no further deposits can be made until the following tax year, even if withdrawals have been made.
You can hold both a cash and an investment ISA with the same provider. But you're not restricted to any one ISA or any one provider. It is possible to transfer old and existing ISA accounts to other providers (see the note on Transfers below).
Any unused allowance at the end of the tax year is lost and cannot be carried over. But any money you do invest remains tax-free as long as it remains within an ISA.
Why Invest in an ISA?
ISAs are a great way to make your savings deliver more. The best feature of an ISA is that no tax is payable on any of the income received from savings and investments. This includes savings interest, dividends, and capital gains.
ISAs can also be an effective means to beat inflation.
Transferring your ISA:
You can switch your old or existing ISA funds by arranging a transfer through a new provider. If you withdraw your funds manually, they will cease to be tax free and will count towards your allowance again.
If you've already invested into an ISA during the current tax year, you'll have to transfer the entire year's contributions to the new provider if you want to contribute further.
You can transfer funds from previous tax years without affecting your annual allowance.
You can also transfer funds between cash and stock ISAs in either direction as you prefer.
Check the terms and conditions with your ISA provider to find out if you will be charged for transferring. [See our guide on Transferring Cash ISAs for more information.]
What Protection is Provided for ISAs?
Cash ISAs are protected in the same way as normal savings accounts. If an ISA provider collapses, the Financial Services Compensation Scheme (FSCS) guarantees savings up to £85,000 per registered institution.
For more details about this scheme, including non-UK providers, see the 'compensation' section on our main savings account page and our guide on Secure Savings and Compensation.
Stocks and shares ISAs are defined as risk products, so a different level of FSCS protection applies. Money is covered if the provider of the investment product collapses - for example, a bank providing an investment ISA.
But losses on shares and redundant shares in a collapsing company are not protected as this is considered part of the risk inherent in higher-yield investment products.
If shares have been bought through a stockbroker, they remain the property of the investor if the broker collapses.
What to Remember With ISAs:
All accumulated ISA savings from past years will still provide tax free interest. The amount that could be saved through a tax-free stockpile is substantial. [See our guide to Cash ISAs for more details.]
If you're unhappy with the rate of return on an ISA, it can be transferred to a new provider. The new provider must arrange the transfer. Closing ISAs or manually withdrawing money will remove funds from their tax-free status.
ISA providers must be authorised by the Financial Conduct Authority and approved by HM Revenue & Customs. This provides access to complaints procedures, the Financial Ombudsman Scheme and the Financial Services Compensation Scheme if problems arise.
ISAs in 2014/2015:
From July 2014, the following changes came into effect:
- The individual ISA allowance rose to £15,000.
- Any combination of cash or stocks is allowed.
- Savers can transfer funds between cash and stocks in both directions.