What is an ISA?

Investment Savings Accounts (ISAs)

The term ISA is an abbreviation for Individual Savings Account. ISAs were introduced on 6th April 1999. They replaced the PEP (Personal Equity Plan) and the TESSA (Tax Exempt Special Savings Account) as the way to save tax free. The reason given by the government for introducing ISAs instead of PEPs and TESSAs was to encourage more people to save. The ISA is free from all Income tax and Capital Gains Tax. The government pledged that the ISA would be available for the next ten years, but it would review the tax credit in 2004. In that review the government decided to end the tax credit in ISAs and PEPs. This means that the tax paid on dividends received, is no longer reclaimable. This greatly reduces the advantages of ISAs to the basic tax payer when the income received in the ISA is from a dividend rather than from interest. An example of interest is that received from a corporate bond fund, where the ISA manager reclaims the 20% tax paid. However, over the long term having no Capital Gains Tax will be beneficial. Additionally, you do not need to include ISA income on your tax return.

Stocks & Shares or Cash ISAs

There are two types of ISA: A Stocks & Shares ISA and a Cash ISA. In Stocks & Share ISAs you have a maximum annual investment of £11,280. In a Cash ISA the limit is £5,640. You are allowed to put £5,640 in a Cash ISA and then put up to £5,640 into a Stocks & Shares ISA. (Thus going up to the £11,280 limit). You are able to transfer your ISAs to other ISA accounts. (Warning, do not close an ISA and then look for a new account. Closure will invalidate your tax exemption. You must transfer from one ISA to another). You are also allowed to switch your Cash ISAs into Stocks & Share ISAs but not the other way round.