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Individual Savings Accounts (ISA's)

Posted:Abigail Andrews - Tuesday, June 26th, 2007

What is an ISA?

Whats so good about an ISA, well, in a nutshell - more for you and less for the taxman. While saving is always a great habit to get in to, it can mean the taxman gets his hands on some of your hard earned money. But it doesn't have to be like that as you have a tax efficient allowance each year in the form of an Individual Savings Account (ISA).

Putting savings in an ISA means individuals do not have to declare any income or capital gains they receive to the Taxman. A financial year runs from 6th April until the 5th April the following year. The limits are set at £7,000 until 2009 after which they may or may not be available or they maybe replaced with another tax-efficient vehicle.

ISA's mean your savings could work a lot harder for you. For example, if you have money in a savings account, the bank will automatically deduct tax on your interest. With an ISA you don't have to pay capital gains tax or income tax, so there'll be less reason for the taxman to be rubbing his hands and more reason for you to celebrate.

Who can open an ISA?

How do ISA's Work

Maxi ISAs and Mini ISAs are made up of 'components'. There are two different components people can invest their money into:

Cash

This part allows individuals to invest in Building Society deposits, UK and European authorised Bank deposits, cash unit trusts or National Savings. This is a good choice for short-term savings especially if individuals want to access their money easily.

Stocks & Shares

This component allows individuals to invest in collective shares, for example, Unit Trusts, Investment Unit Trusts, shares listed on a recognised stock exchange, bonds and gilts and Life Assurance. This type of ISA is good if individuals are able to leave their money alone for a long period of time, usually over five years, and are comfortable taking on the risk of market fluctuations in the value of their investment. However, with these types of accounts there is no guarantee that the return at the end of the term will exceed the amount invested.

Different Types of ISAs

There are two types of ISAs - Maxi ISA and Mini ISA. An individual can only subscribe/contribute to either one Maxi ISA or up to two Mini ISAs each tax year. Money cannot be invested in both a Mini and Maxi ISA in the same financial year.

Maxi ISA

The maxi ISA is aimed at those who want mainly to invest in stocks and shares. Your entire maxi ISA investment must be with one financial company such as a bank or fund management group. Individuals can invest money in up to two different components (Cash and Stocks & Shares) for each Maxi ISA. A Maxi ISA must have a stocks & shares component, but the Life Assurance and Cash component are optional. A maximum of £7,000 can be invested each financial year. This can be divided between the two components in whichever way an individual wishes.

Mini ISA

The mini ISA is principally targeted at savers who want to hold some of their money in an account which pays interest. You can have a mini cash ISA and a mini stocks and shares ISA, each from different financial product providers so you can shop around for each individual element. Individuals can only invest in one component of a Mini ISA each financial year. Unlike the Maxi ISA, the amount you can invest is fixed for each component. For the risk averse or for those only wanting a Cash ISA from a building society or bank this will be the favoured option.

Another advantage of a Mini ISA is that it provides greater flexibility allowing individuals to invest in a Cash ISA with, say, a building society and a Mini Stocks and Shares ISA with a company that specialises in equities (however, as can be seen from the chart below this limits the amount you can invest into stocks and shares to a maximum of £4,000 - it could be higher in a Maxi).

Cash ISAs

Like regular savings accounts, some providers offer different types of Cash ISAs. Some providers will offer instant access to money with no penalty or loss of interest. Some other providers have restrictions, such as a fixed term or require notice to be given before money can be withdrawn. If a withdrawal is made within a fixed period then a penalty or loss of interest may result.

How much can I save each year?

Below, the table shows the maximum amount that can be invested into each component.

When the maximum allowance has been invested for one financial year individuals are not able to invest any more even if a withdrawal has been made. For example, A Cash ISA is opened and £2,000 is invested at the start of a financial year, the maximum amount that can be invested over the remainder of the year is £1,000. If a withdrawal of £500 halfway through the year is made, the maximum amount that can be invested is still £1,000 not £1,500. Providing no more withdrawals are made and the remaining maximum investment is made, the balance at the end of the year would be £2,500. The total amount of money invested into a Cash ISA each year is £3,000 regardless of the number of withdrawals made.

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