All About ISAs

ISAs are often advertised as tax-free savings vehicles, but many people wonder how this works in practice.

ISAs were introduced in 1999 and replaced the earlier Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs). ISAs were explicitly designed to appeal to a broader range of the population than these earlier products, which were sometimes claimed to be exclusively for the benefit of the middle classes. However, ISAs have been criticised as confusing. Those who choose these types of accounts are allowed to invest up to specific certain amount each year.

A stocks and shares ISA is one of the available options, with £7,200 allowed to be stored in one of these. Alternatively, an ISA can be used to store £3,600 in cash and £3,600 in stocks and shares.

Importantly, the taxman does not need to be informed of any money earned through investing in one of these accounts.

The amount of money that can be gained by choosing an ISA over a traditional savings account depends on the level of income tax an individual pays. For example, those on the higher band – set at 40 per cent – would also have to pay 32.5 per cent of tax on any dividend income from a traditional savings option. With an ISA, they pay no tax on their earned interest.

There are also a number of rules regarding transfers – money can be moved between cash ISAs, but not from one of these into a share-related ISA, for example.

ISAs run during the tax year rather than the usual calendar year and dividends can be paid monthly or annually in April.

There are a range of account options available, including instant access, fixed-rate and those which track the Bank of England base rate. It is worth asking your bank or building society to outline their current offerings and explain the specific benefits of each one.

The value of the upper limit that can be deposited in an ISA each year is set by the Chancellor of the Exchequer and is reviewed periodically. You should check the current value before you invest.

It should also be noted that an ISA can only be held in one name – joint accounts are not available.

If you would like to know more about ISAs why not ask AnswerBank Business and Finance.