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ISAs - An Introductory Guide
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by: Russell O Sullivan
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Word Count: 549
You'll almost certainly have heard of one, but exactly what is an Individual Savings Account (or ISA, which is a term which is probably more familiar to you)? The government brought in ISAs in 1999 as a means of encouraging savings by way of tax incentives. ISAs are not entirely "tax-free" - as many people will tell you - but unlike other vehicles for saving and investing, are exempt from tax on interest and on capital gains. An individual's maximum amount of savings in ISAs each year, from 6 April 2008 is £7,200.
Cash or Equity?
ISA savings can take the form of either cash deposits or can be held as stocks and shares (i.e. equities). If you choose cash, then this is deposited with a bank or a building society as an ISA, which generally attracts a higher rate of interest than an ordinary savings account. You can be certain of getting back the cash you've invested, together with the interest it earns. If you choose instead to invest in stocks and shares, this can be in either unit trusts, investment funds or separately traded stocks and shares. With this kind of equity ISA, of course, the value of the stocks and shares can go down as well as up, so you bear the risk of losing the value of your original investment.
There's no cost attached to investing in a cash ISA, just the cash you deposit. For an ISA comprising stocks and shares, however, you will normally have to pay a set up fee (usually around 4 or 5% of the value) and an annual administration fee (usually between 1 and 1.5%). Since the fees you'll actually pay will vary from company to company, it will pay to shop around.
Tax
Interest on ISA savings is tax-free, so there's no tax to pay on cash ISAs. Any income on share dividends, though, is taxed, so a basic-rate taxpayer would pay 10% tax on dividends (just as he or she would on dividend income outside an ISA arrangement). Higher-rate taxpayers are benefitted, however, since they also pay just 10% on ISA held dividend income, whereas it would be 32.5% if the equities were outside an ISA arrangement.
The future
The government announced changes to the way ISAs operate with effect from the new financial year in April 2008. These are designed to simplify the arrangements somewhat by removing the distinction between the now defunct mini and maxi ISAs and an increase from the £7,000 savings limit to £7,200.
Another change is that each individual can transfer across their previous years' cash ISA holdings into stocks and shares and this will not affect their current year's tax allowance. They can then continue investing up to the full ISA allowance £7,200 including up to £3,600 in cash.
Remember ...
An Individual Savings Account, or ISA:
* can be a tax-efficient way to save
* generally offers a higher rate of interest than an ordinary savings account
* allows you to invest up to £3,600 in cash
* can be held either as cash savings or an investment in stocks and shares
About the Author
Learn more about ISAs at http://www.confused.com/savings
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