Individual Savings Accounts (ISAs)
ISAs and why they make sense
Individual Savings Accounts (ISAs) let you save money in cash and stocks and shares. Their main benefit is that you pay no income tax or capital gains tax on investments held in an ISA, unlike for example if you were to invest in shares directly. So an ISA is often referred to as a ‘tax wrapper’ as it goes around your savings, protecting them from paying these taxes.
The allowance runs with each tax year and if you don’t take advantage of it it is lost.
ISA facts to know
- No set investment term - invest for as long or as short a period as you wish
- If you are under 50 you can invest up to £7,200, of which £3,600 can be deposited in a Cash ISA. If you are 50 or over you can invest up to £10,200, (£5,100 in a Cash ISA). But the higher limit applies to all from 6 April 2010.
- You can only have one ISA in any tax year with one provider
- There’s no income tax or capital gains tax to pay on investments held in an ISA – but the level of tax benefits and liabilities arising from investment will depend on individual circumstances and may change in the future
- There is usually a minimum investment – with our ISA it is £100 per month.
- You don't need to include ISAs in your annual self-assessment tax return
- You must be 18 or over and resident in the UK for tax purposes
| Illustration of the effect of holding investment in an ISA Based on a basic rate tax payer where no tax saving is made on the income | ||
| Initial Investment - Return over 5 years (to Nov 2009) - New value of holding - Profit before tax - | £7,000 201.8% £21,126 £14,126 | |
| Capital gain tax paid | Not held in an ISA | ISA |
| £2542.68 | £0 | |
| Source: Directors Report November 2009 | ||
You should remember, however, that investments can fall as well as rise in value and you may not get back the full amount invested. Stock market linked investments should therefore be treated as a medium-to-long term commitment of at least five years.
