Guide to ISAs: allowances and rules explained
What is an ISA?
Individual Savings Accounts are a savings scheme set up by the Government. Simply put, they give you tax advantages on your savings. There are two types of ISAs – a cash ISA and an investment ISA (also known as a stocks and shares ISA). Within cash ISAs, the interest earned is free of UK income tax. Within stocks and shares ISAs the investments held are free of UK income and capital gains tax (although where relevant, tax is paid on any dividend income).
How to pay less tax on your savings
Our comprehensive guide to ISAs answers your questions on cash ISAs and stocks and shares ISAs (also known as investment ISAs) so you have the basic information to help you make the best decisions for your money. Simply click on one of the questions below to reveal the answer.
You must be resident or ordinarily resident in the UK to hold an ISA and you must be aged 16 or over to hold a cash ISA, and 18 or over to hold a stocks and shares ISA.
Remember: in the simplest terms, your ISAs give you tax advantages on your savings, so you get a higher return on your money.
What is the difference between a cash ISA and a stocks & shares ISA?
A cash ISA is like a normal savings account, but you don’t have to pay UK income tax on your interest, provided all ISA conditions are met. Some cash ISAs are offered as a fixed-term or fixed-rate account.
A stocks and shares ISA allows you to invest in the stock market. Stocks and shares ISAs are classed as being 'tax-efficient' as, although your returns are free of UK capital gains tax, there are other taxes payable on your investment. As your money is invested in the stock market, the value of your investment will rise or fall accordingly so you could end up with less than you invested.
Stocks and shares ISAs usually fall into two types:
- Open ended, which have no fixed maturity date, although they are designed to be held for the medium to long term (five years and longer). Their value at any particular time will always depend on how well the underlying investments perform, so if this has been poor it could be less than the original amount invested, irrespective of how long it has been held.
- Fixed term investments which are usually held for five years or more: if customers access their money early they could get back less than originally invested.
How much can I save in an ISA?
Your annual ISA allowance is £10,680 in the 2011/2012 tax year. Of this, up to the first £5,340 can be saved in a cash ISA with one provider. All of your allowance or the remainder can be saved in a stocks and shares ISA. The value of tax relief depends on individual circumstances. Annual limits are subject to review. The Government's favourable tax treatment of ISAs may not be maintained.
What are my annual ISA allowances?
| Tax Year | Cash ISA Limit | Stocks & Shares ISA Limit | Total ISA Limit |
|---|---|---|---|
| 2011-12 | £5,340 | £10,680 | £10,680 |
I have used my annual cash ISA allowance for this tax year.
As your total ISA allowance is £10,680 you can still invest a further £5,340 in a stocks and shares ISA.
How many ISAs can I have?
There is no limit on the number of ISAs you can hold but you can only subscribe (pay in) to one cash ISA and one stocks and shares ISA per tax year. This could be a cash ISA with one provider and a stocks and shares ISA with a different provider, or both with the same provider. But you must ensure you do not exceed the maximum annual subscription allowances set out within the previous questions and answers.
ISA Saver – Issue 1
- Earn tax-free interest 1
- Open from £1
- Instant access
Transfers-in from other ISAs are not allowed
Already invested your full cash allowance?
Take a look at our range of investment ISA products to maximise your investment ISA allowance.