What is an ISA?
Read our guide to find out exactly what an individual savings account is and why you’re missing out if you don’t have one
Individual savings accounts, or ISAs as they’re more commonly known, are tax-efficient ways to save and invest your money. Introduced in 1999, they now hold more than £385 billion of the UK’s savings and investments. So what makes them so popular with savers and investors alike?
There are two different types of ISA – cash ISAs, which are available to anyone aged 16 and above, and stocks and shares ISAs, which are for anyone aged 18 and above.
Cash ISAs are a form of savings account offered by banks and building societies. Just like other accounts, any money you save into them earns interest but, unlike traditional savings accounts, this interest is paid tax-free. Stocks and shares ISAs invest in the stockmarket through investments such as shares, government bonds (gilts), corporate bonds and collective investments such as investment trusts, unit trusts and open-ended investment companies (OEICs).
The latest kid on the ISA block is the junior ISA (JISA). These operate just like the adult version, but with a smaller £3,600 allowance that family and friends can use.
Tax benefits The key benefit of any ISA is its tax-efficiency, which can help your money to grow faster than if it was
The key benefit of any ISA – cash or stocks and shares – is its tax-efficiency, which can help your money grow faster held in a comparable taxed product – this can make a significant difference to the amount you receive. Basic-rate taxpayers pay 20% tax on their interest, higher-rate taxpayers 40% and those paying tax at the additional rate pay 50%.
To illustrate, if you had £1,000 in an ISA paying 3% interest, this would earn you £30 over a year. If you were a basicrate taxpayer, this would reduce to £24, with it falling to £18 or just £15 for higher-rate and additional-rate taxpayers respectively.
“Cash ISAs are a no-brainer for anyone with savings,” says Sue Hannums, director of savingschampion.co.uk.
EASY I SA GUIDE 2012 | MONEYWISE 3