Individual Savings Accounts

A tax-efficient wrapper for your fund choices

Individual Savings Accounts (ISAs) were introduced in April 1999 by the Government to replace Personal Equity Plans (PEPs) and Tax Exempt Special Savings Accounts (TESSAs). During this current tax year you can shelter up to £11,520 from tax by investing in an ISA.

ISA allowance
Each tax year you have an ISA allowance. For the tax year 2013/2014 (6 April 2013 until 5 April 2014) you can save up to £5,760 in a Cash ISA with the remainder in a Stocks and Shares ISA, or you can invest your full allowance in a Stocks and Shares ISA. Youíre only permitted to invest with one Cash ISA provider in each tax year and the same, or another, Stocks and Shares ISA provider.

Make up any unused shortfall
If you havenít already used up your full ISA allowance you canít retrospectively make up any unused shortfall later ñ itís lost forever. UK residents aged 16 and over can choose to save in a Cash ISA or, if they are 18 or over, a Stocks and Shares ISA or a combination of both. Parents or guardians can also open a Junior ISA for children under 18.

The interest on a Cash ISA isnít taxed, so all the interest you earn you keep. With a Stocks and Shares ISA, all gains are free from capital gains tax (CGT) and you donít need to declare your ISA investments to the taxman.

ISA options
You can invest in two separate ISAs in any one tax year: a Cash ISA and a Stocks and Shares ISA. This can be with the same or different providers. By using a Stocks and Shares ISA, you invest in longer-term investments such as individual shares or bonds, or pooled investments.

In the current 2013/14 tax year you can invest a total of £11,520 into an ISA if you are a UK resident aged 18 or over. You can save up to £5,760 in a Cash ISA, or up to a maximum of £11,520 in a Stocks and Shares ISA.

Cash ISA only
£5,760 maximum in a Cash ISA

or

Stocks & Shares ISA only
£11,520 maximum in a Stocks and Shares ISA

or

Cash ISA and Stocks & Shares ISA
No more than £5,760 in a Cash ISA and the balance in a Stocks and Shares ISA up to a combined total of £11,520

Tax-efficient matters
ISAs are tax-efficient investments with no income tax on any income taken from the ISA. There is no CGT on any gains within an ISA. Interest paid on uninvested cash within the Stocks and Shares ISA is subject to a 20 per cent HM Revenue & Customs (HMRC) flat-rate charge. Interest received in a Cash ISA is tax-free. Dividends from equities are paid with a 10 per cent tax credit which cannot be reclaimed in an ISA but there is no additional tax to pay. You donít have to inform the taxman about income and capital gains from ISA savings and investments.

If you hold bond funds in your ISA, the income generated would be free of income tax. This could be a real benefit if you need to take an income from your investments, perhaps as you near retirement. Even if you donít want to invest in bonds at the moment, you may want to move money from equity funds into bonds in the future, perhaps when you need to take an income from your investments or if you want to reduce the level of risk in your portfolio as you near retirement.

Transferring your ISA
If you have money saved from a previous tax year, you could transfer some or all of the money from your existing Cash ISA to a Stocks and Shares ISA without this affecting your annual ISA investment allowance. However, once you have transferred your Cash ISA to a Stocks and Shares ISA it is not possible to transfer it back into cash.

ISAs must always be transferred; you canít close the old one and start a new one, otherwise you will lose the tax advantage. If appropriate, you may wish to consider switching an existing Stocks and Shares ISA if you feel the returns are not competitive. But if you have a fixed-rate ISA, you should check whether you may have to pay a penalty when transferring.

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