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To promote savings and encourage people to put aside more money for their future, the government established a new type of savings account in 1999. It’s called an Individual Savings Account (known as ISA for short) and it enables a certain level of tax-free saving. You don’t have to pay tax on the interest or income you earn from the account up to a specified upper threshold. There are a few different types of ISAs on the market, each with different regulations. Here’s a quick introduction to them and how they can help you to save effectively. It’s intended as information only. If you want financial advice on what products are best for your specific needs, you should make an appointment with a professional financial advisor. The most you can contribute to an ISA in each financial year without incurring tax on either interest accrued on savings or capital gained on investments is £7,000. (The financial year runs from April to March.) You can of course contribute more than the limit to your ISA account, but you will be taxed on anything above the limit. You can invest your money in either life insurance policies, stocks and shares or cash savings, in either a mini or a maxi ISA. A maxi ISA has a tax-free investment limit of £7,000. You can use the whole amount for investing in stocks, shares and life insurance, or save up to £3,000 cash and put the remaining £3,000 into any of these investments. Although there are different ways of investing and saving your money in a maxi ISA, they must all be made with the same financial provider. The alternative to a maxi ISA is to open up to two mini ISAs in one financial year, one of which can be cash and the other of which must be investments (although you can use both of them to invest in life insurance). The mini cash ISA tax-free threshold is £3,000 and the limit for investing tax-free in shares and stocks is £4,000. You can have each of your mini ISAs with different companies. ISAs are provided by private financial organisations that meet the approval of the Inland Revenue. Most large companies will offer types of ISA products, such as large shop chains, high street banks, building societies and fund managers. However, each provider has the scope to set their own interest rates and investment options for shares and stocks, so ISA products can vary significantly from one company to another. Investigate in detail exactly what each company is offering to decide which is the best deal for you. Something else to bear in mind is that the fees for administration and fund management can fluctuate considerably so ask upfront about all fees and charges before you make your choice on which product represents the best value for money. Another advantage of ISAs is that they are very flexible. They have been designed to make your finances as easy as possible to manage and to allow you to be able to move your money around freely to suit your own needs. You can withdraw your money from an ISA at any time (although you may need to give some degree of notice and there may be a fee). You can also move your funds from one ISA provider to another. (However, it’s not permitted to change the type of ISA, for example from an investment ISA to a cash ISA – regardless of whether you stick with the same provider.) Also, if you do decide to transfer your ISA funds from one ISA to another, you must do so in a single transaction from one to the other. It’s not possible to withdraw the money from your old ISA and then deposit the cash in your new ISA in two separate transactions. Cash ISAs are available to all UK residents aged 16 or above and investment ISAs can be opened by any UK resident aged 18 or above. However, if your job or your partner’s job involves you working and living overseas (e.g. if you work in the Civil Service or the Army), you will still have access to ISAs. This article is copyright protected and is not for republishing |
