Individual Savings Accounts-ISAs

What are ISAs? This article descibes what ISAs are all about and gives some good advice on what you can and cannot save or invest in an ISA

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 £7,000. The government has said that the limit will stay at £7,000 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 £7,000 in a Maxi ISA, including stocks and shares and cash.

Type of Maxi ISA	Savings limits (2006-2007)
Stocks and shares only	up to £7,000

or a combination of the following:

Type of Maxi ISA	Savings limits (2006-2007)
Cash	up to £3,000
Stocks and shares	to make up the rest of the £7,000

Mini ISA

You can put money into just one type of Mini ISA, or both, up to these limits:

Type of Mini ISA	Savings limits (2006-2007)
Cash	up to £3,000
Stocks and shares	up to £4,000

How much tax will you save?

Interest from savings :

if you pay tax at the basic rate, you would usually pay 20 per cent tax (2006-2007) 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 save tax on the remaining 22.5 per cent

CGT savings:

If you make gains of more than £8,800 from the sale of shares and certain other assets in the tax year 2006-2007 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.)

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).