Individual Savings Accounts (ISAs) are tax-favoured savings and investment accounts. They were introduced in 1999 to replace PEPS and TESSAs. You can use an ISA to save cash, or invest in stocks and shares.

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 - any capital growth will be tax-free and there is no further tax to pay on any dividends you receive

Types of ISA

There are two types of ISA:

Maxi ISAs:  These can contain cash, investment-based life insurance or stocks and shares. All the investments in a Maxi ISA must be with the same ISA manager.

Mini ISAs:  Can contain either  stocks and shares, a life insurance policy or other medium to long term investments; or cash.

In each tax year (from 6 April to 5 April the following year), you can put money into either:

  • just one maxi ISA or
  • two mini ISAs (one stocks and shares and one cash)

Savings and investment limits for ISAs

The most you can save and/or invest in a tax year is £7,000.

Maxi ISA:

You can save up to £7,000 in a Maxi ISA, including stocks and shares and cash.

  • Stocks and shares only - up to £7,000

or a combination of the following:

  • Cash - up to £3,000
  • Stocks & shares - up to £4000

Mini ISA:

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

  • 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, outside an ISA you would usually pay 20 per cent tax (2007-2008) on your savings interest
  • if you pay tax at the higher rate, outside an ISA you would usually pay tax at 40 per cent
  • if you pay the ’starting rate’ of tax (10 per cent) outside an ISA you would pay tax at 10 per cent

Dividend income:

  • if you’re a starting rate or basic rate taxpayer inside or outside an ISA 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; in an ISA you won’t get back the 10 per cent dividend tax credit element of this, but you will save by not having to pay any additional tax

Capital Gains Tax (CGT) savings:

  • If you make gains of more than £9,200 from the sale of shares and certain other assets in the tax year 2007-2008 you would normally have to pay 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.

Source: DirectGov. Crown copyright.