ISA Information and Explanations

Moneyspider does not give advice as to the suitability of any investments

ISA Information and Explanations
- Saving and Investing in ISAs

ISAs are savings schemes, which were introduced in 1999 to encourage people to save by offering tax incentives.

If you would like more general information about saving and investing, visit the IMA website.

What is an ISA?

ISAs allow people to save their money in a range of investments such as cash, stocks and shares, and life insurance products. Unlike investing directly in these products, investing through an ISA provides certain benefits. An ISA is often referred to as a “tax wrapper” which goes around your savings, protecting them from paying certain taxes.

Am I eligible?

You may invest in an ISA if:

You are aged 16 or over (if you are under 18 you can only invest in a cash ISA. After your 18th birthday you can also invest in a stocks and shares ISA); and
You reside in the United Kingdom for tax purposes (or are a Crown employee currently working overseas and treated as resident, or are married to a person who performs such duties).

You cannot hold an ISA jointly with anyone else, or hold one on behalf of another person.

How do ISAs work?

There are two types of ISA – cash, and stocks and shares. Each has different limits. Within the stocks and shares component you can hold investments such as individual stocks and shares, investment products such as authorised unit trusts, open-ended investment companies (OEICs), investment trusts and life insurance products as well as gilts and corporate bonds. The cash component permits you to hold bank/building society deposit accounts, National Savings and Investment products and investment or insurance products which aim to produce a cash like return e.g. money market funds.

Note that not all managers will offer both components and may not provide the full range of permitted investments.

If at any time you are unsure about your investment objectives or attitude to risk, you should contact a financial adviser. Details of how to contact a financial adviser can be found at the back of this factsheet.

Making savings work harder

How Much Can I Save or Invest in an ISA?

Everyone can place at least £7,200 per tax year in an ISA. You can invest a lump sum, a series of lump sums or a regular amount (for example, £50 per month), but you must check with your ISA manager(s) as to the minimum amounts you can invest, as this will vary from company to company.

ISA Limits

If you are under 50 you can currently invest up to £7,200 in an ISA over the course of the 2009/10 tax year. If you are over 50 you can invest £10,200 this tax year (of which up to £5,100 can be in cash) but the increase will not come into effect until 6 October 2009. From 6 April 2010 the increased limit of £10,200 will be available to all eligible investors.

For 2009/10 if you are under 50 the maximum you can invest in a stocks and shares ISA is £7,200. The maximum you can invest in a cash ISA in any tax year is £3,600. Therefore, you could choose to invest the entire allowance in a stocks and shares ISA or you could split it between a cash ISA and a stocks and shares ISA. For example, £3,600 in a cash ISA and £3,600 in a stocks and shares ISA or £2,000 in a cash ISA and £5,200 in a stocks and shares ISA.

You can now transfer money from cash to stocks and shares ISAs. If you move money from an existing cash ISA to a stocks and shares ISA it will not count as part of the £7,200 annual allowance. For example, you could transfer £10,000 from your existing cash ISA(s) to a stocks and shares ISA and invest a further £7,200 that year. You will maintain all your tax-free benefits on the £10,000. But you cannot move money from a stocks and shares ISA to a cash ISA in the same way.

Helpful Hint
There are two types of ISA – cash, and stocks and shares.
Investment products such as authorised unit trusts, OEICs and investment trusts can be held in the stocks and shares component along with eligible life insurance products.

What are the Benefits of Investing in ISAs?

There are Income and Capital Gains Tax benefits.
You do not have to declare your ISA on your tax return.
The ISA manager will either receive income gross of tax or reclaim the savings tax from HM Revenue and Customs on your behalf. You don’t have to do a thing.

Income Tax

Money held in the cash component of an ISA is entitled to receive income without being charged savings tax.
Higher rate taxpayers are exempt from paying the extra 25% tax on dividends from equity investments which they would normally pay on investments outside an ISA wrapper.
Corporate bonds, which pay out fixed interest distributions, held in an ISA are entitled to receive income gross of tax or reclaim the savings tax of 20% (as appropriate).
Interest paid on cash held temporarily in a stocks and shares ISA will be taxed at a rate of 20%, but higher rate taxpayers will suffer no further tax liability.

Capital Gains Tax
All gains from any investments sold within an ISA are free of Capital Gains Tax (CGT), but it is important to note that any losses cannot be offset against gains made elsewhere.

What Happens If . . .

I want to cancel my ISA?
If you invest into an ISA on the basis of a recommendation by a financial adviser, you have the right to cancel your investment if you change your mind. To cancel your investment you must notify the manager by returning the cancellation notice you receive from them, generally within 14 days of receipt.

I would like to move my ISA from one manager to another?
In the year of subscription you can transfer your ISA to a different manager, but it must include all contributions made to that ISA in the tax year. After the first year of subscription, the rules are more relaxed and partial transfers between ISA managers are permitted. Under new rules, from April 2008 you can now transfer components. You also need to make sure that your new ISA manager is willing and able to accept your transfer.

Click here to visit our switch page, where we will rebate 50% of any commissions we receive from your fund manager, adding to your investment, and all tax benefits will be maintained.

I want to withdraw some or all of my money?
You can withdraw as much money as you wish from your ISA at any time, subject to the terms of your ISA. If you do and then want to put it back in later in the year, however, it will count against your normal ISA subscription limits for that year e.g. if you invested £6,000 and withdrew £2,200 you would only be able to put £1,200 back in, as this would bring you up to the maximum limit of £7,200.

Things go wrong?
First take up your complaint with the ISA manager. If the manager is unable to satisfy your complaint, you can take up the matter with the Financial Services Ombudsman. The manager is obliged to tell you who to write to.

I have taken out too many ISAs?
Mistakes do happen, but you must tell the manager straight away. The manager will ask you to contact HM Revenue and Customs, as in certain circumstances you may be able to keep your ISA open.

IMPORTANT NOTICE

The value of the current tax relief depends on your individual circumstances. If you have any doubts about your tax position or whether or not an ISA is suitable for you, you should seek professional advice.

Further Information

If you would like to read more about unit trusts and open-ended investment companies (OEICs) or obtain details of your nearest financial adviser, then visit the Investment Management Association website, IMA, who have a range of free information.