Individual Savings Accounts

A tax wrapper can be wrapped around either the underlying investment or the pooled investment, and means you pay less or no tax. An example of a tax wrapper is an Individual Savings Account (ISA). An ISA is not a product on its own, but a tax wrapper around a savings or investment product, which protects your money from being taxed.

 

What can you save or invest in an ISA?

ISAs can be used to:

save cash in an ISA and the interest will be tax-free

invest in shares or funds in an ISA – any capital growth will be tax-free and there is no further tax to pay on any dividends you receive

You can invest in two separate ISAs in any one tax year: a cash ISA and a stocks and shares ISA. This can be with the same or different providers. By using a stocks and shares ISA you invest in longer-term investments such as individual shares or bonds, or pooled investments (such as open-ended investment funds or investment trusts).

The current ISA limits are:

If you were born on or before 5 April 1960 (that is, aged 50 or over during the current tax year) you can save up to £10,200. The full £10,200 can be invested in a stocks and shares ISA with one provider or up to £5,100 can be saved in a cash ISA with one provider, with the remainder being saved in a stocks and shares ISA with either the same provider or another.

If you were born after 5 April 1960 you can save up to £7,200. The full £7,200 can be invested in a stocks and shares ISA with one provider or up to £3,600 can be saved in a cash ISA with one provider, with the remainder being saved in a stocks and shares ISA with either the same or another provider. From 6 April this year, the ISA limit will increase to £10,200, up to £5,100 of which can be saved in cash for all ISA investors.

According to the age 50 rule, someone who is currently under age 50 but who will reach age 50 between 6 October 2009 and 5 April 2010 will only be able to pay in more than £7,200 during the 2009/10 tax year (up to a maximum of £10,200) once they have attained their 50th birthday. So, for example, if an investor will not attain age 50 until 1 March 2010, they will not be able to pay in more than £7,200 until 1 March 2010.

From 6 April 2010 the limit is £10,200 (of which £5,100 can be saved in cash) for everyone.

If you choose to invest the whole allowance in an investment ISA, this can only be with one provider in any one tax year.

Transferring an ISA
If you have money saved from a previous tax year, you can transfer some or all of the money from your cash ISA to a stocks and shares ISA without this affecting your annual ISA investment allowance. However, once you have transferred your cash ISA to a stocks and shares ISA it is not possible to transfer it back into cash.

ISAs must always be transferred, you can’t close the old one and start a new one, otherwise you will lose the tax advantage. If appropriate, you may wish to consider switching an existing stocks and shares ISA if you feel the rate is not competitive. But if you have a fixed-rate ISA, you should check whether you may have to pay a penalty when transferring.