Saving and investing with ISAs
Individual Savings Accounts (ISAs) are tax-free savings and investment accounts. They were introduced in 1999 to replace PEPS and TESSAs. You can use an ISA to save cash, or invest in stocks and shares.
What can you save or invest in an ISA?
- You can save cash in an ISA and the interest will be tax-free
- You can invest in shares or funds in an ISA and any capital growth and dividend income will be tax-free
Types of ISA
There are two types of ISA:
- Maxi ISAs can contain cash, investment-based life insurance or stocks and shares. All the investments in a Maxi ISA must be with the same company
- Mini ISAs can contain either stocks and shares, or cash, or a life insurance policy
In each tax year (from 6 April to 5 April the following year), you can put money into either:
- Just one maxi ISA
- Two mini ISAs (stocks and shares or cash)
Savings and investment limits for ISAs
The most you can save and/or invest in a tax year is £7,200. The government has said that the limit will stay at £7,200 until April 2010 (Any money you put into a TESSA-only ISA does not count towards your limit.)
Maxi ISA
You can save up to £7,200 in a Maxi ISA, including stocks and shares and cash.
| Type of Maxi ISA | Savings limits (2008-2009) |
|---|
|
Stocks and shares only
|
up to £7,200
|
or a combination of the following:
| Type of Maxi ISA | Savings limits (2008-2009) |
|---|
|
Cash
|
up to £3,600
|
|
Stocks and shares
|
to make up the rest of the £7,200
|
Interest from savings:
- If you pay tax at the basic rate, you would usually pay 20 per cent tax on your savings interest
- If you pay tax at the higher rate, you would usually pay tax at 40 per cent
- If you pay the 'starting rate' of tax (10 per cent) you would pay tax at 10 per cent
Dividend income:
- If you're a starting rate or basic rate taxpayer you pay tax at 10 per cent on dividend income; this is taken as a 'tax credit' before you receive the dividend and cannot be refunded for ISA investments
- If you're a higher rate taxpayer you would normally pay tax on dividend income at 32.5 per cent; you won't get back the 10 per cent dividend tax credit element of this, but you will will save tax on the remaining 22.5 per cent
CGT savings:
If you make gains of more than £9,600 from the sale of shares and certain other assets in the tax year 2008-2009 you would normally have to pay Capital Gains Tax (CGT). However, you do not have to pay any CGT on gains from an ISA. (But losses on ISA investments can't be used to reduce CGT on gains from investments outside the ISA.)For 2008-09 and later years, CGT is a flat rate of 18%. Different rates applied for years before 2008-09.
Can anyone pay into an ISA?
To pay into an ISA you must be:
- A UK resident – with two exceptions: Crown employees, such as diplomats or members of the armed forces, who are working overseas but paid by the government; and their husbands, wives or civil partners
- Over 16 for the cash component
- Over 18 for stocks and shares.
An ISA must be in your name alone; you can't have a joint ISA.
Further information
For further information you can call the HM Revenue & Customs helpline on 0845 604 1701 (open 8.30 am to 5.00 pm Monday to Thursday and 8.30 am to 4.30 pm on Friday).
