A Guide To Individual Savings Accounts

It is becoming increasingly common to invest money into high interest savings accounts. Whether it is for your children, your retirement or even for your next house, ISAs can be very useful.

What Is an ISA?

An Individual Savings Account is a way to save and invest money without incurring the usual income or capital gains taxes. In fact, usually an ISA will cost no more than the charges of the investments held within it. Anyone over the age of 16 may have a Cash ISA but it is not possible to invest in a Stocks and Shares ISA until the age of 18. Placing money in a bank account will make a small amount of interest (the percentage increase in value of your money over time), but placing it in an ISA means that although it is not readily available for you to withdraw, you will gain considerably more interest on the amount you invest. It is for this reason that people use ISAs to save over a long period of time.

You may make cash deposits, such as, bank and building society deposits, market unit trusts, some National Savings products and even some existing accounts which you would normally pay tax on. You can also invest stocks and shares, which must be recognised by the Inland Revenue as well as Life Insurance funds.

What Are the Tax Benefits?

If you are over 18 an ISA will enable you to invest up to £7,200 on a tax-efficient basis each year. However, from 16 to 18 you are able to invest £3,500 a year. You do not have to pay income or capital gains tax on the proceeds of an ISA and the investments you hold within the account.
If you have a Stocks and Shares ISA it works slightly differently. Although you will be exempt from paying capital gains tax, you will still have to pay income tax on your dividend income (the amount you earn from your shares). Interest from deposits and corporate bonds will be taxed at 20%.

Finding an ISA Provider

There are many different banks and building societies that offer ISAs. You must make sure you are careful about which one you pick. Make sure you shop around and find one with ideal rates and with minimal hidden charges or catches. It is worth talking to an accountant or money expert if you are unsure.

If you wish to transfer your ISA to another ISA manager you can usually ask the new ISA manager to arrange the transfer. Your existing ISA provider cannot stop you transferring but they may make you pay a charge or insist that you sell your existing ISA investments and transfer cash.