A guide to ISAs

Since ISAs were introduced in 1999, millions of people in the UK have taken advantage of the tax-free savings opportunities they offer. Interest rates differ according to the provider and there are two kinds of ISA; cash and investment. The latter is also known as a stocks and shares ISA and is becoming increasingly popular with those who are looking for potentially higher returns.

If you’re new to the ISA market, have some savings and don’t want to pay tax, here’s a guide to the two different products.

What is a cash ISA?

ISA means Individual Savings Account and is a way to create tax-free savings in the UK. If you pay tax through your earnings or pension perhaps, it’s a great place for your savings; up to a certain limit each year. The interest on an ISA is completely tax-free which differs from a standard savings account where the interest is taxable.

Whilst there isn’t a great deal of difference in the features of a cash ISA and a standard savings account – other than the tax incentives – the real difference is that there is a limit you can pay into a cash ISA in any one financial year.

Withdrawals from a cash ISA can be made at any time of the year but you can’t ‘replace’ the money until the following April if you’ve already used your full annual allowance. This is, however, set to change from April 2016.

Once your ISA is set up and you’re using it, you don’t have to stay with the same financial provider; you can transfer it whenever you want. The process can differ depending on who you have your ISA with so it’s wise to talk to them first to discover if there are any penalties you could incur.

What is an investment ISA?

Having an investment ISA (or stocks and shares ISA) gives you more freedom as to where your money is invested. There is still a limit to the amount of money you can invest tax free each year in the same way as a cash ISA, but for those looking for potentially higher returns, there is much more of an opportunity to have a say in how and where the money is placed.

If you choose an investment ISA, you will be able to talk to someone about the different stocks and shares available. They will usually cross over different market sectors, could be shares in companies from a range of countries around the world and will vary in asset type. By investing this way there are many opportunities for a return. An investment ISA is good for anyone wanting a long term product and is prepared to accept that stock markets can fall as well as rise.

What are the annual tax-free limits?

The amount you can save tax free each year changes; for the 2015-16 financial year it is £15,240 per person. From April 2016 there are some changes which will be implemented so if you’re looking to start an ISA in the near future it is wise to carry out some research and talk to an independent advisor.

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