Find out more about ISAs; the difference between Cash and Stocks and Shares ISAs (also known as Investment ISAs), how they could save you tax, and other common questions.
An ISA is an Individual Savings Account which offers a tax-efficient way to either invest or save. ISAs are one of the most popular and accessible tools to benefit from generous tax breaks offered by the government to encourage you to save.
An ISA is not an investment in its own right but a home for you to house your savings within.
The best way to think of an ISA is as a 'wrapper' in which you can shelter your savings and investments from tax.
Within an ISA there is no capital gains tax and no UK tax on income or interest. ISAs don't need to be declared on a tax return, and less tax means higher returns for you.
Any UK resident aged 18 or over (16 for Cash ISAs) can invest in an ISA. There is no upper age limit and savings can be withdrawn whenever you choose.
Used regularly, the annual ISA allowance offers the chance to create a substantial portfolio sheltered from the taxman, although remember tax rules can change, and the benefits will depend on personal circumstances.
Every year each individual has an ISA allowance. This tax year the allowance is £15,240.
There are three types of ISA available for your savings or investments. Cash ISAs, Stocks & Shares ISAs and Innovative Finance ISAs. All provide a tax-efficient way to save your money whether you decide to invest a lump sum or top up your ISA with a regular monthly payment.
A Cash ISA is essentially a tax-free savings account, while a Stocks and Shares ISA allows you to invest in funds, shares and other investments. Within a Stocks & Shares ISA all gains are tax-free, and there is no tax to pay on income. An Innovative Finance ISA is a new type of ISA allowing savers using peer-to-peer lending platforms to earn tax-free interest.
In April 2017 the government are also introducing a new Lifetime ISA to help adults under 40 save for a first home or retirement. You can find out more about the Lifetime ISA here.
A stocks and shares ISA offers the opportunity to invest your ISA allowance. Here are some of the investments you can choose.
Remember, all stock market investments can fall in value as well as rise, so you could get back less than you invest.
Tax benefits of investing in a Stocks & Shares ISA
|Basic rate tax-payer||Higher rate tax-payer||Additional rate tax-payer||Within an ISA|
|Capital gains (in excess of the £11,100 annual allowance)||10%||20%||20%||0%|
|Dividend income over £5,000 (i.e. income from shares)||7.5%||32.5%||38.1%||0%|
|Interest income (i.e. from cash, corporate bonds and other fixed interest investments)||20% |
Tax rules change over time and the benefit of sheltering your investments from tax will depend on your circumstances.
Cash ISAs operate just like a normal savings account except the interest is tax-free. Interest rates vary and they are often offered with temporary bonuses or introductory rates.
Cash can form a good basis for a portfolio - unlike stock market investments, cash savings can offer immediate access and the capital is guaranteed not to fall in value.
Cash ISAs are often more suitable for short term investing, typically less than 5 years whereas a Stocks and Shares ISA is usually regarded as more suitable for longer term investing, typically for more than 5 years.
Stock market investments can fall in value as well as rise so you could get back less than you invest. Over the longer term they can deliver significantly higher returns but they are higher risk. Please remember past performance is not a guide to the future.
Open your ISA today from as little as £25 a month or with a lump sum of £100 or more. If you're unsure where to invest in your Stocks & Shares ISA, you can open it today, hold your money as cash in your Stocks & Shares ISA and then choose your investments later.