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What is an ISA?

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ISA stand for Individual Savings Account, and they’re the most basic form of tax avoidance available to residents of the UK.

When did we start using an ISA?

Back in the ‘80s and early ‘90s, the forerunners to ISAs were launched by the Thatcher and Major governments. You may remember PEPs (Personal Equity Plans) and TESSAs (Tax Exempt Special Savings Accounts): These were ways of owning UK company shares or holding cash without having to pay tax on dividends or interest. PEPs encouraged the Great British Public to invest in business rather than simply having bank or building society accounts, and reflected the Thatcher era policy of encouraging everyone in the UK to own a stake in the nation’s industry.

The idea stuck, and many investors still own these products even though they’re no longer open to new investors. However in April 1999 they were closed and replaced with the ISA, which follows the same principles under a different set of rules:

How much can I save in an ISA?

You can subscribe up to £5,760 in a Cash ISA for the 2013/14 tax year, and the limit increases every year. To invest, simply contact your bank, building society or supermarket and they’ll explain what you need to do, or simply go online and invest via a comparison site. Different providers will offer different interest rates just like any bank or building society, however unlike a standard bank account the government won’t deduct any tax on the interest you earn. That means if you’re a standard rate taxpayer you’ll make a quarter more in interest; if you’re a higher rate payer than you‘ll benefit even more.

What is an ISA?Stocks and Shares ISAs

Cash ISAs can be bought every year, and you can transfer older plans to newer ones to take advantage of superior interest rates – and you can also transfer money from Cash ISAs into Stocks and Shares ISAs:

Stocks and Shares ISAs do allow you to invest in individual company shares, although they’re generally used with collective investment schemes like Open-Ended Investment Companies or Investment Trusts. Just as savings accounts are taxed at source, investments like these are subject to deductions as well: Income from company dividends is taxed, as are interest payments on bonds – and capital gains on share price increases are also taxed.

Investing in a Stock and Shares ISA eliminates these tax burdens, and allows your investment to grow at a much faster rate, and with each successive year’s growth there’s a compounding effect as your investment grows, so you benefit even more.

Stocks and Shares ISA limits

The 2013/14 limit for investing in a Stocks and Shares ISA is £11,520, however this includes the Cash ISA limit so if you use the full amount then you won’t be able to invest in a Cash ISA.

Can you make withdrawals from your ISA?

Many investors assume that once you invest in an ISA you can’t make withdrawals from it, but that’s entirely incorrect: Subject to the rules of your particular product provider, you can withdraw any time you wish and the remaining amount left in your ISA will continue to enjoy tax-free status.

Stop paying tax on your savings

Now that ISAs have been with us for well over a decade, they’re firmly established as a first port of call for anyone in the UK with spare cash, so if you’ve got any money in a current account that’s sitting doing nothing, think of the tax you’re paying on it: It may not be obvious, but HMRC are creaming off some of your interest for themselves, so think strongly about using your ISA allowance instead.



About Catherine Stern

About Catherine Stern

Catherine Stern is a freelance writer with a background in marketing and PR. She currently writes web content on a range of subjects, from finance and business to travel and home improvements. As a working single mum of two young boys she understands the pressures that today’s working parents face and the topics they want to read about.

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