ISAs are often referred to as “tax wrappers”. This means that you pay no tax, or less tax than usual, on the income you earn or on the profits you may make on your investments.
ISAs (Individual Savings Accounts) were introduced by the government in 1999 to encourage people to save. There are two types:
These are tax-free savings accounts. You can get them from banks, building socities and other providers.
Maximum annual allowance: £15,000 (from 1st July 2014).
Could I lose money? No, but the spending power of your savings could go down if interest rates don't keep up with inflation.
Tax: You don't pay any tax on the interest from your cash ISA.
Cash ISAs enable you to save money in bank or building society deposit accounts, National Savings and Investment Products, and any other products that aim to produce a cash-like return. Any interest earned is tax-free.
They may be more suitable for people who prefer not to take risks with their money. Although it is not possible to lose the money invested in cash ISAs, it is important to remember that inflation can erode the value of cash over time.
A stocks and shares ISA lets you invest tax efficiently in shares, gilts, corporate bonds, authorised funds (Unit Trusts and OEICs) and life insurance products.
Maximum annual allowance: £15,000 (from 1 July 2014).
Could I lose money? The value of your investment can go down as well as up. There are a range of different investment options, some carrying more risk than others.
Tax: You don't pay tax on capital gains pr the dividends held inside your ISA.
Where to get one: Through Moneyspider. Click here to buy
By investing within a stocks and shares ISA, the tax you pay will be less than if you held the same investments outside an ISA (see below for further details on the taxbenefits).
It is important to be aware that the value of your investment can go down as well as up in line with the performance of the stock market. Therefore, stocks and shares ISAs are more likely to be suitable for people who are willing to accept some investment risk.
You can invest in an ISA if:
But, you cannot hold an ISA jointly with another person or hold an ISA on behalf of another person.
So, assuming you have the maximum annual allowance of £15,000 to invest in 2014/2015, you can choose to put all that investment into a stocks and shares ISA, or all of it into a cash ISA, or you can split it between a stocks and shares ISA and a cash ISA. For example, £6,000 in a cash ISA and £9,000 in a stocks and shares ISA, or £9,000 in a cash ISA and £6,000 in a stocks and shares ISA.
You can invest up to the maximum ISA allowance, either as a lump sum or by making regular payments into your ISA(s) (for example, £50 per month or more). Your ISA manager will be able to tell you what the minimum amount is that you can invest.
Money withdrawn will not be taxed. But always check the terms and conditions of the ISA first.
It is important to note that if you withdraw money from your ISA, it will still count towards the maximum ISA allowance for that tax year. You will not be able to put extra money back into the ISA in the same tax year to take you up to the maximum.
For example, if in 2014/2015 you invest £9,000 in a stocks and shares ISA and then withdraw £2,200, you would be able to put back in only £6,000, as this takes you up to the maximum contribution limit for the year of £15,000 (the original £9,000 plus the extra £6,000).
Click here to buy or switch your ISAs using Moneyspider, where we will rebate 50% of any commissions we receive from your fund manager, adding to your investment, and all the tax benefits will be maintained.
You must notify the manager by returning the cancellation notice you receive from them, generally within 14 days of receipt.
For example, if you buy your ISA in the 2014/2015 tax year and then want to transfer to a new manager in the same year, you must move all the contributions you have already made into the ISA in 2014/2015. You will need to check that the new ISA manager is willing and able to accept the transfer.
However, you should first check whether your current provider will impose a penalty.
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 the tax benefits will be maintained.
It will not count as part of the £15,000 annual allowance. For example, in 2014/2015 you could transfer £17,000 from your existing cash ISA(s) to a stocks and shares ISA and invest a further £15,000 without losing your tax-free benefits.
However, from 1 July 2014 you can also move money from a stocks and shares ISA to a cash ISA.
First, take up your complaint directly with the ISA manager. If the manager is unable to satisfy your complaint, you can pursue the matter with the Financial Services Ombudsman.
They will ask you to contact HM Revenue and Customs, as in certain circumstances you may be able to keep your ISA open.
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.
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.