ISAs

What is an ISA?

An Individual Savings Account (ISA) is a tax efficient savings vehicle introduced by the government in April 1999 to replace PEPs and TESSAs. Under the current regulations you have no further liability to income tax or capital gains tax in respect of your investments held within an ISA.

 

Requirements to invest in an ISA

You can invest in an ISA provided:

  • You are aged at least 18 (16 for cash ISAs only); and
  • You are resident and ordinarily resident in the United Kingdom for tax purposes; or
  • You are a non-resident Crown employee (eg a member of the armed forces) or his or her spouse.

Tax advantages of an ISA

There are currently three major tax advantages to investing in an ISA:

  • Income tax - Following the removal of the 10% dividend tax credit on 6 April 2004 there is no income tax advantage for basic rate tax payers from holding equity funds within an ISA. However, higher rate tax payers still benefit as there is no further tax to pay inside an ISA.  Interest distributions from bond and gilt funds currently remain tax-free within an ISA as the 20% tax can continue to be reclaimed by the Account Manager.
  • Capital gains tax - All gains within your ISA are free of capital gains tax.
  • Tax returns - Normally income and capital gains from ISAs do not have to be reported on your tax return.

There is no minimum investment period needed to qualify for these tax benefits.

Maxi ISAs and Mini ISAs

In April 2008, Mini and Maxi ISAs were replaced by Cash ISAs and Stocks and Shares ISAs. Mini Cash ISAs and the cash components of Maxi ISAs were reclassified as Cash ISAs. Mini Stocks and Shares ISAs and the stocks and shares components of Maxi ISAs were reclassified as Stocks and Shares ISAs.

The definition of stocks and shares (for a Stocks and Shares ISA) can include unit trusts, investment trusts, open ended investment companies, investments on any recognised stock exchange, corporate bonds, shares held in a savings related share option scheme and gilts. Whereas, a Cash ISA can include bank & building society accounts, cash unit trusts, national savings products (excluding national savings certificates and premium bonds) and money market deposits.

 

Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.


ISA investment limits

The investment limits for an ISA are:

Investment ISA limit
Stocks and shares    £11,520*
Cash      £5,760

* Less amount invested in a Cash ISA.

Stocks and Shares ISA

Investment may be made as a lump sum or through regular savings. You can invest the full £11,520 with one provider, either solely in stocks and shares, or as a mixture of stocks and shares and cash.

Cash ISA

You are allowed to invest up to £5,760 in each tax year in cash with one provider. The remaining £5,760 of your ISA allowance may be invested in stocks and shares with the same or another provider.