Even a savvy saver can find the jargon around ISAs and tax-efficient savings daunting. If you’re thinking of moving your money but don’t understand what ISAs are or how they work, follow our handy guide to help you take advantage of tax-free savings and our best ISA deals from our range.
ISAs made easy
ISA simply stands for ‘Individual Savings Account.’
There are two are two types of ISA – Cash ISAs and investment ISAs.
What is a cash ISA?
A cash ISA is like a normal savings account but offers the following key benefits:
- The income you accrue from your cash ISA savings is tax free.
- Interest earned in a cash ISA can be up to six times higher than the bank rate depending on the current promotional offers available to savers.*
- You can opt for an instant access cash ISA, which means you can access your money if you need to at any time.
What is an investment ISA?
An investment ISA is a tax efficient wrapper for your investments which have certain qualifying criteria. (I.e. You must be at least 18 for an investment ISA and resident and ordinarily resident in the UK for tax purposes.)
If you deposit funds in an investment ISA (also known as a stocks and shares ISA), your money will be invested in the stock market.
Investment ISAs are free from capital gains tax and income tax but the tax credit on dividend income received is not reclaimable. Investment ISAs have the potential to outperform cash savings but you need to be aware that, as these ISAs operate within the stock market, their value at any given time can fluctuate as returns depend on the performance of the underlying investments – so you can lose money as well as make money.
Before moving your money, you may want to consult your financial adviser to identify the best ISA deals and investment plan to suit your needs.
Remember, eligibility for ISAs depends on your individual circumstances, and the rules around them – such as their tax treatment – could change in the future.
How much can I invest?
All UK nationals have an annual ISA allowance of £10,200.
- You can put up to £5,100 of your £10,200 annual allowance in a cash ISA.
- You can invest the remainder of your allowance (£5,100) in an investment ISA.
- You can spread your allowance across both cash ISA and an investment ISA. For example, you could put £2,200 in a cash ISA and invest £8000 in shares.
- You are able to invest the full £10,200 in an investment ISA.
- The annual ISA allowance will increase to £10,680 (of which up to £5,340 can be saved in a cash ISA) for the next tax year, which starts on 6 April 2011 and ends on 5 April 2012.
It’s important to think about your attitude to risk before investing in an investment ISA because the returns are not guaranteed, and you may end up with less money than you originally put in because the value of investments can go down as well as up.