The basics of Isas - what they are, how they work, and why it can make good sense to invest in them rather than a standard savings account.
In simple terms, an Isa (or Individual Savings Account) allows you to save money without paying tax on the interest you receive. There are two types of Isas available:
At the start of each new tax year (6 April) you’ll receive a new Isa allowance
You can pay into one account of each type during the tax year, which runs from 6 April to 5 April the following year.
Isas have a number of tax benefits that make them a desirable investment tool:
To open an Isa you must be:
Remember: To open an Isa you’ll need to provide a form of ID, such as a passport or driving licence, along with your National Insurance number.
The Isa allowance is the amount the government permits you to invest in your Isa accounts during each tax year.
At the start of each new tax year (6 April) you’ll receive a new Isa allowance, and it’s wise to use as much of your allowance as you can because it cannot be rolled over to the next tax year.
Once you’ve invested money in your Isa you can keep it there, and it will continue to earn tax-free interest. By using your allowance to top up your Isa each year it’s possible to accumulate a significant amount of tax-efficient savings.
Remember: By investing as much as you can into your Isa at the start of the tax year you can earn the maximum amount of interest on it.
The Isa allowance for the current tax year (2013-14) permits:
Your allowance is flexible in so much as it provides you with the following investment options:
With an easy access cash Isa you can withdraw money without giving notice and without penalty. Other types of cash Isas, such as fixed rate Isas, may be more restrictive.
The current rules allow you to transfer a cash Isa to a stocks and shares Isa, but a stocks and shares Isa cannot be transferred to a cash Isa
However, when you withdraw money from a cash Isa or stocks and shares Isa you cannot re-invest it at a later date with the intention of topping the balance up. This is because you can only invest up to the Isa allowance for that tax year, regardless of how many withdrawals you make.
For example, during tax year 2013-14, if you have a cash Isa allowance of £5,760 and you invest £4,500 at the start of the tax year you can still invest a further £1,260 before the year ends. However, if you withdraw £1,500 of the original £4,500 you will still only be able to invest an additional £1,260 as your maximum investment limit for the year is £5,760.
Similarly, if you invested the full £5,760 at the start of the year and then withdrew half of it, you would not be able to pay in any more money until your new allowance became available at the start of the next tax year.
The current rules allow you to transfer a cash Isa to a stocks and shares Isa, but a stocks and shares Isa cannot be transferred to a cash Isa. You can also transfer each type of Isa to another product of the same type. You can, for example, transfer one cash Isa to another.
Remember: When a child trust fund matures it can transferred into an Isa.