What is an ISA?

An ISA stands for Individual Savings Account, and is a way of individuals being able to save without pay tax on interest that is gained. People can save up to £7,200 a year before they pay tax on interest. ISA’s were introduced by the government in 1999 to encourage saving and investment.

Types of ISA’s

There are two types of ISA; Cash ISA’s and Stocks and Shares ISA’s.

A Cash ISA is simply an account where savers can save their money without paying tax on any incurred interest. In many ways it is just like a normal savings account, with the account holder able to take money out whenever they choose. The benefit is that it allows easy access to the account and is often at a fixed rate, so customers know the interest they will receive before they open the account. It is only possible to save a maximum of £5,340 a year though; any more people want to save must be done so though a Stocks and Shares ISA.

Depending on the particular ISA, Stocks and Shares ISA’s can work in a variety of ways. The most common is it being invested through an Investment Trust, known as an ISA Trust. Here an investment company pools together ISA investments from a number of their customers and spreads around the investment for maximum potential returns. Stocks and Shares ISA’s are usually the better option for savers who don’t want to use their savings for several years. It isn’t possible to withdraw whenever the account holder pleases, with the terms depending on the provider. The main reason this suits long term investors is that stocks can rise significantly, although there is also the risk of it falling. In most cases, though, stocks will rise long term. As well as not having to pay tax on interest, capital gains tax does not have to be paid either.

Savings Payments

With a Cash ISA, account holders can make savings whenever suits them. They may want to pay a set amount monthly, they may make a yearly payment, or they might want to make payments occasionally depending on when they have some spare cash available. With Stocks and Shares ISA’s the terms can vary greatly. Some have specific payment schedules that must be adhered by while others offer more flexibility.

Increased Limits for those Born Before 6th April 1960

Those born before 6th April 1960 can save an extra £3,000 a year tax free in an ISA, so up to £10,200. A maximum of 50% of this can be saved in a Cash ISA, with the remaining half having to be paid into a Stocks and Shares ISA. If savers choose, though, they can put the whole amount into a Stocks and Shares ISA.

ISA’s are a great way of saving. They make it possible for individuals to save a certain amount without paying tax on the interest or any gains. If saved in regular savings accounts people would have to pay 20%, 40% or 50% tax on any gains depending on their income. ISA’s give added incentive for people to save.

Andrew Marshall (c)