Individual Savings Accounts (ISAs) Explained

It's easy to be confused about Individual Savings Accounts (ISAs). Over the years they seem to have had many re-inventions, everything from their name to the amount of cash you could put into an ISA on a yearly basis has changed but hopefully we'll help clear up any ongoing confusion.

ISAs are the smartest way to save because you don't get taxed by the government on the money you put into an ISA account. That means 100% of the interest is yours to keep.

With other savings accounts the Government deducts a somewhat invisible sum from the interest which you make on the account yearly before that interest is handed over to you, but with ISAs, the Government gives you a break and doesn't take anything.

The only catch? You can only put up to £10,200 or £7,200 into an ISA each year depending on your age, HMRC set these limits as follows:

Aren't There Different Types of ISA?

There are now officially only two kinds of ISA, a Cash ISA and a Stocks and Shares ISA. A Cash ISA is simply a savings account and you can put your entire £10,200 or £7,200 ISA limit in one or invest a portion of it in stocks and shares. If you do this, then the amount you can keep in a Cash account is reduced to £5,100 or £3,600.

Higher-rate tax payers don't have to pay additional capital gains tax on their shares as a result of a Stocks and Shares ISA. Non-taxpayers and basic rate tax payers are no better off, however.

Why Shop Around?

Not all ISAs are made equal. In fact, the higher interest rate on your ISA, the more money you stand to earn in interest, it's that simple. Some ISAs give lower interest rates than others and offer no difference in services, so get online and check out what's on offer. However, you must remember, using more than one price comparison site is best and the better deals might not always be at the very top of the list.

For Stocks and Shares ISAs there are plenty of special accounts which can be opened with banks, with these you'll usually receive a little advice and guidance, especially if you're new to share dealing. More advanced share dealers, who understand the markets well could opt for a 'self-select' Stocks and Shares ISA which will allow them to choose their own investments.

Experienced share dealers also often use the Stocks and Shares ISA wrapper to go through 'execute-only' online stock brokers and discount brokers to get good deals on their share purchasing whilst also benefiting from not having to pay Capital Gains Tax when they sell their shares.

Are There Any Charges?

The simple answer is no. Or rather, there shouldn't be. Usually ISAs don't have any additional charges associated with them at all but occasionally, with some 'self-select' ISAs there is a setting up or administration charge initially. If you choose a Stocks and Shares ISA you'll also have to pay for some transaction charges to sell or buy shares.