Individual Savings Accounts (ISAs)
What is an Individual Savings Account (ISA)?
An ISA is a type of savings account. Basically, if you save in an ISA you are entitled to keep all that you receive from that investment and not pay any tax on it. This is not the case with, for example, an ordinary bank or building society account unless you are a non-taxpayer. See the HMRC’s booklet IR111 ‘Bank and Building society interest. Are you paying tax when you don’t need to?’ (PDF 564K) and A Guide for Savers for more information on bank and building society accounts.
ISAs began on 6 April 1999 and will be around until at least 6 April 2009. You can start with small amounts and save up to £7,000 each tax year until 2005-06 and up to £5,000 in each tax year from 2006-07. The reduction from £7,000 to £5,000 after 5 April 2006 is subject to consultation. A tax year runs from 6 April to 5 April in the following year.
You can put money in and take it out whenever you want and you do not even have to tell your HMRC office that you have an ISA.
The ISA scheme provides different ways of saving to meet people’s different needs. You can plan for the short term, or put your money away for much longer.
Until April 2005 there are three ways – called ‘components’ – in which your money can be invested: cash savings, stocks and shares and some specially designed life insurance policies.
- Cash ISAs may be suitable for short-term savings, so that you can get at your money easily.
- Stocks and shares ISAs may be appropriate if you can afford to leave your money untouched for longer than, say, five years. However, your investment may go down in value as well as up and there are no guarantees that you will make a profit.
- Life insurance ISAs are also for long-term saving and offer some built-in life cover in the case of your death. Again, there are no guarantees that you will make a profit and you may get back less than you put in, particularly if you take your money out after only a few years. However, some types of policy, including ‘with profits’ policies, are designed to iron out the ups and downs of the stock market.
After 5 April 2005, the life insurance ISA is merging with the stocks and shares ISA. However, you will still be able to hold life insurance products in your ISA.