1) There are two types of ISA. Every year the government gives you a tax-free allowance in the form of an Individual Savings Account – commonly known as an ISA. There are two sorts of ISA – a Cash ISA and a Stocks and Shares ISA. A Cash ISA normally has an interest rate based on the Bank of England’s base rate. A Stocks and Shares ISA, on the other hand, can go up and down in value, depending on the underlying value of the assets it holds.
2) The allowance for 2013/14 is £11,520. In the tax year from April 2013 to April 2014, you can put up to £11,520 in your ISA. You can put all of that into a Stocks and Shares ISA, or you can put up to £5,760 in a Cash ISA, putting the rest into a Stocks and Shares ISA.
3) ISAs are popular. Savers have paid over £210 billion into ISAs since their launch in April 1999.
4) Cash ISAs are the most popular. By way of example, in the tax year 2011/2012, of the £53.9 billion invested in ISAs, more than £38bn (70 per cent) went in to Cash ISAs.
5) ISA limits have increased over time. ISAs replaced PEPs (Personal Equity Plans) and TESSAs (Tax Exempt Special Savings Accounts). Neither were particularly simple. Up to £9,000 could be deposited into a TESSA over five years, limited to £3,000 in the first year and no more than £1,800 each subsequent year. PEPs were distinguished between General PEPs, which had a maximum deposit of £6,000, and Company PEPs, which had a maximum of £3,000.
When they were first launched in 1999, ISAs were quite complicated, too. If you paid even £1 into your Cash ISA, your Stocks and Shares ISA limit was reduced by £3,000. The allowance also included a life assurance ISA of up to £1,000. This unpopular product was scrapped in April 2005.
In 1999 the total ISA allowance was £7,000. This was raised to £10,200 in 2010/11 (having already been raised to people over 50 from October 2009). In March 2011, the Chancellor announced that the annual ISA allowance would rise in line with the retail price index.
6) “Stocks and Shares ISA” is a confusing label. A Stocks and Shares ISA can, in fact, be invested in anything from equities to corporate bonds, gilts to gold, unit trusts to wheat futures.
7) Tis the season to be saving. “ISA season” is the name the financial services industry gives to the final few weeks of the tax year (normally starting at the beginning of March) which sees the lion’s share of ISA deposits – and of ISA advertising money. Many Cash ISA providers offer bonus rates which expire after a year in a bid to attract new business. There have been fears for the 2013 ISA season as Cash ISA rates continued to tumble in January. In 2012, it was easy to get a Cash ISA paying over 3 per cent. By late January it was difficult to secure 2.5 per cent. This is partly because the Government’s £80 billion Funding for Lending scheme has made banks less reliant on savers’ deposits.
8) ISAs are great for dividends. If you earn dividends from your investments outside an ISA, you pay tax of 32.5 per cent if you’re a higher rate taxpayer and 42.5 per cent if you’re an additional rate taxpayer –although 10 per cent of this is automatically deducted before you receive the dividends. If you’re investing via an ISA, you pay only 10 per cent tax on the dividends. Basic rate taxpayers also don’t need to pay additional tax on dividends, regardless of whether they hold the assets within a stocks and shares ISA or not.
9) ISAs are great for bonds. If you use your Stocks and Shares ISA to invest in interest-bearing investments, such as corporate bonds and gilts, the interest is entirely tax-free. £10,000 invested in a bond fund paying an average interest coupon of 5 per cent would grow to £26,533 over 20 years, assuming no fall in capital values. The same amount held outside an ISA, and subject to 50 per cent tax, would be worth £16,386.
10) It’s easy to transfer. You can transfer a Cash ISA to another Cash ISA provider or to a Stocks and Shares ISA. You can also transfer a Stocks and Shares ISA to another Stocks and Shares ISA provider (although the investments will change in order to do so). You can’t, however, transfer a Stocks and Shares ISA to a Cash ISA.
And remember: an ISA may not be the most tax efficient approach for everyone, and tax legislation could change in the future. Everyone’s personal tax situation is unique. If you are unsure if an investment is right for you, please seek independent financial advice.
Which? guide: http://www.which.co.uk/money/savings-and-investments/guides/stocks-and-shares-isas-explained/
An FT guide: http://www.ft.com/personal-finance/isas-2012