Individual Savings Accounts
ISAs
What are they?
.jpg)
Individual Savings Accounts (ISAs) are tax-free savings accounts available to most UK residents. Any monies invested into an ISA and any subsequent growth is tax-free, which means individuals do not have to declare any income or capital gains they receive to the Taxman at all regardless of an investors tax position. ISA’s therefore have a place in most peopl's investment portfolios
Individuals can save up to £7,200 each financial year.
NB...A financial year runs from 6th April until the 5th April the following year.
ISAs were introduced by the present Government in April 1999 as a replacement for both Tax Exempt Special Savings Accounts (TESSAs) and Personal Equity Plans (PEPs). They have now become a permanent fixture in the savings world.
NB...In 2004 ISA managers were prevented from reclaiming taxation on dividends thereby reducing the tax efficiency of the stocks and shares component of ISA’s, however, they are still recognised as a very tax-efficient savings vehicle.
Who are they for?
To open an ISA individuals must be aged 18 or over. However, if an individual is aged 16 and over then they are entitled to open a Cash ISA or the cash component of a Stocks and Shares ISA.
Individuals must be UK residents for tax purposes. Anyone working abroad or spouses and civil partners of individuals working abroad, for example civil servants or Armed Forces who are paid by the British Government, are also entitled to open an ISA.
It is not possible to hold an ISA in joint names or on behalf of other individuals. Each ISA is personal to each investor .
There is no minimum investment period, however in the case of Stocks and Shares based ISAs, they should be viewed as medium to long term investments (medium term being classed as 5 years +).
How do they work?
Individual savings accounts offer tax advantages because the investments bought and dividends received are free from any liability to higher rate personal taxation. This means that they should grow faster than comparable investments where tax charges are suffered. It is because of these major tax concessions, however, that the maximum contribution allowable in any one-tax year is restricted.
Each part of an ISA can be bought from a different provider, it is possible to have two mini ISA’s instead of one large one. The same Provider does not have to be used for each year.
Stocks and Shares ISAs and Cash ISAs are made up of different elements or 'components'.
There are two different components people can invest their money into and these are: - Cash and Stocks & Shares (Equities).
Cash Component
.jpg)
This component allows individuals to invest in UK and European authorised Bank deposits, Building Society deposits, or cash unit trusts or National Savings. This is a good avenue for short-term savings especially where any individual wants to access their money quickly and easily. As mentioned previously, the cash component therefore allows individuals as young as 16 years to open either Cash ISAs or the cash component of a Stocks and Shares ISA. With Cash ISAs, investors can benefit from a minimum return amounting to the original sum invested over the term selected plus any interest accrued. Many High Street ISAs offer a fixed rate over a 12 month period.
Just like regular savings accounts, some providers offer different types of Cash ISAs.
Some will offer instant access to the money with no penalties applying or loss of interest. However, other providers can apply restrictions, such as minimum term requirement or they require notice to be given before money can be withdrawn.
If a withdrawal is made within a fixed or notice period then a penalty or a loss of interest may result.
Stocks & Shares Component (Equities)
.jpg)
This component allows individuals to invest in collective shares, for example, Unit Trusts, Investment Unit Trusts, shares listed on a recognised stock exchange, bonds and gilts and Life Assurance. This type of ISA is good if individuals are able to leave their money alone for a long period of time, usually over five years, and are comfortable taking on the risk of market fluctuations in the value of their investment.With these types of accounts there is no guarantee that the return at the end of the term will exceed the amount invested.
Different types of ISAs
There are two types of ISAs - Stocks and Shares ISA and Cash ISA.
An individual can only subscribe/contribute to either one Stocks and Shares ISA or up to two Mini ISAs (one for each component), each tax year. Money cannot be invested in both a Cash and Stocks and Shares ISA in the same financial year.
Maxi ISA
Individuals can invest money in up to two different components (Cash and Stocks & Shares) for each Stocks and Shares ISA.
A Stocks and Shares ISA must have a stocks & shares component, but the Cash component is optional. A maximum of £7,200 can be invested each financial year. This can be divided between the two components in whichever way an individual wishes. See table below for investment options and limits.
Mini ISA
Individuals can only invest in one component of a Cash ISA each financial year.
Unlike the Stocks and Shares ISA, the amount you can invest is fixed for each component. For the risk averse or for those only wanting a Cash ISA from a bank or building society this will be the most suitable option.
The following table shows the maximum amounts that can be invested into each specific ISA component.
|
Stocks and Shares ISA |
Cas ISA | |
|---|---|---|
If the maximum amount shown is invested in this component, then no additional investment can be made in the other component during that financial year. |
|
NB...When the maximum allowance has been made within the tax year, individuals are not able to invest any more even if a withdrawal has been made.
For example:
A Cash ISA is opened and £1,500 is invested at the start of the tax year. The maximum amount that can be invested over the remainder of the year is £2,100. If a withdrawal of £1,000 is made halfway through the year, the maximum amount that can still be invested is £2,100 not £3,100.
Providing no more withdrawals are made during the tax year and the remaining maximum investment is made, the balance at the end of the year would be £2,600. The total amount of money invested into a Cash ISA each year is £3,600 regardless of the number of withdrawals made.
Future changes
A number of reforms will be introduced from 6th April 2008:
- The Mini/Maxi distinction within ISAs was removed. The government will continue to allow individuals to hold these components with either the same or different providers.
- The maximum amount which can be invested into a Cash ISA was increased from £3,000 to £3,600.
- The maximum amount which can be invested into a stocks and shares ISA was increased from £7,000 to £7,200, subject to an overall limit of £7,200 subscribed into both ISAs in a tax year.
Further reforms are also expected:
- Individuals with funds saved in the cash component of ISAs from previous years will be able to transfer those funds into the stocks and shares component without affecting their annual investment limit.
- Personal Equity Plans will be brought within the ISA wrapper.
- Child Trust Fund accounts will be able to rollover into ISAs when they start to mature from 2020 onwards.
NB...The favourable tax treatment currently available for ISAs might not continue in the future.
