ISAs (Individual Savings Accounts) were introduced by the Government in 1999 to give UK residents a tax efficient way of saving.
There are two types of ISA – Cash ISAs and Stocks and Shares ISAs. There are slightly different rules for each type of ISA, regarding who can have them and how much can be invested.
Who can have an ISA?
Anyone who is currently and ordinarily resident in the UK can open an ISA. You need to be 18 or over to open a Stocks and Shares ISA and over 16 for a Cash ISA.
ISAs can only be owned by one individual.
ISAs and Tax
ISAs are highly tax efficient because:
You don't pay any additional tax on income you receive
You don't pay tax on any capital gains arising from your investments
You don't have to inform HMRC about income and capital gains from your ISA
There are agreed limits – set by the Government – about how much you can put into your ISA in a single tax year.
For 2011/12 these are:
£10,680 for a Stocks and Shares ISA
£5,340 for a Cash ISA
You are allowed to have both a Stocks and Shares and a Cash ISA in the same tax year, but you can only contribute up to £10,680 (2011/12) in total, with no more than £5,340 (2011/12) of that sum being paid into a Cash ISA.
You can only put money into one cash ISA and one stocks and shares ISA in a tax year.
Please remember the value of your investments and any income from them can go down as well as up and you may get back less than the amount you originally invested. Tax rules may change in the future and taxation will depend on your personal circumstances. All investments carry an element of risk, which may differ significantly. If you are unsure as to the suitability of any particular investments, you should seek professional financial advice.
Why should I have an ISA?
To put it simply to save and invest without paying tax.
With a Stocks and Shares ISA you pay no Capital Gains Tax and there is no additional tax to pay on dividend income. If you have a Cash ISA you don't have to pay any tax on the interest you earn.
When should I take out an ISA?
While you can take out an ISA at any time, to make the most of the tax benefits they offer, you should consider taking it out as early as possible in the tax year – April 6 2011 to April 5 2012.