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The Lolly guide to ISAs

In our quick guide to ISAs we explain what an ISA is, how they work and why you should invest in one.

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by Victoria Bischoff on Apr 07, 2011 at 10:31

It's a new tax year and you will be happy to hear your ISA allowance has now increased. But what does this mean, and what is an ISA?

What is an ISA?

An ISA (Individual Savings Account) is a tax-free savings account designed to give you 100% of the interest you earn on your investment.

Basic rate tax payers usually lose 20% of the interest they make on their savings, while higher rate tax payers lose 40%. But if you save your money in a tax-free ISA, it will act as a ‘protective wrapper’ preventing the taxman from claiming a chunk of your interest. 

What types of ISAs are there?

There are two main types of ISAs: cash ISAs and stocks and shares ISAs.

Cash ISAs work in the same way normal savings accounts do. You choose if you want a fixed rate account, an easy access (or instant access) account or a regular savings account. The only difference is that you don’t pay tax on the interest you earn.

With a stocks and shares ISA you can invest in individual stocks and shares or investment funds. Any profit you make will not be subject to capital gains tax - another nice tax break. However everyone, both basic rate and higher rate taxpayers, is expected to pay the usual 10% tax on dividend earnings.

Who can save in an ISA?

Anyone who is 16 or over and a UK resident can save money in a tax-free cash ISA, though to save in a stocks and shares ISA you need to be at least 18.

How much can I invest?

As of April 2012, the ISA limit increased for everyone by £600 to £11,280 per tax year.

Of this, the maximum amount you can put into a cash ISA is £5,640, and then the remainder must go into a stocks and shares ISA.

On the other hand, you could choose to place the whole £11,280 into a stocks and shares ISA.

When should I invest?

As long as you have not exceeded the £11,280 ISA limit you can invest in an ISA at any point during the year.  

However, around the end of every tax year is known as ‘ISA season’. This is the time when people are encouraged to use up their remaining ISA allowance and pick what ISA they want for the next tax year.

Investing early in the tax year is important because the longer your money accrues interest, the more money you will make.

How many ISAs can I invest in?

You can only invest in one cash ISA and one stocks and shares ISA each year.

However, you can invest in different ISAs in different years, and there is no limit as to how many ISAs you invest in over time. 

Can I withdraw my money?

Yes you can. However, how easy it is to make withdrawals depends on the type of ISA you have invested in.

While with an easy access account you can withdraw your money whenever you want, some fixed rate ISAs require you to give your provider notice before you make a withdrawal. And with others you might lose some interest or your bonus if you take your money out early. 

If you do want to withdraw money from your ISA it is important  to understand that if you later decide you want to reinvest it, it will count against your annual ISA allowance.

For example, say you invest £5,340 in a cash ISA and then later withdraw £2,000. If you decide you want to reinvest your £2,000 later in the same tax year, you will not be able to as you have already invested your yearly limit and will therefore have to wait until the next tax year.

Can I transfer my savings?

You can move money from a cash ISA into either another cash ISA or stocks and shares ISA, but you can only transfer money from a stocks and shares ISA into another stocks and shares ISA.

You can also choose to split the money in ISAs from previous years between different providers. But the money you have saved in the current tax year must be moved as a whole.

However, it is important to remember you should never try to transfer your money by simply closing your account yourself. If you do you risk losing your tax benefits as there is a limit to how much you can save each year (see ‘can I withdraw my money’ above).

Instead, always ask your new provider to arrange the transfer for you. But be aware that not all ISAs accept transfers.

Will my savings be safe?

As of this year, under the Financial Services Compensation Scheme (FSCS) deposits up to £85,000 and investments up to £50,000 per individual per institution are protected. 

This means that if you save £100,000 in one single financial institution and the bank collapses, you are only guaranteed to get some of your money back. If you split your £100,000 between two separate organisations however, all of your money will be protected.

Be aware that many of the high street’s biggest banks share the same Financial Services Authority (FSA) registration and therefore count as a single financial institution - HSBC and First Direct for example. This means under FSCS rules only £85,000 of your money in both banks combined will be protected. If in doubt contact the FSA's consumer helpline on 0845 606 1234.

How do I pick an ISA?

If you want to invest your money in a stocks and shares ISA, you are already in the right place with Citywire Money.

We have all the news and comment you need to provide you with the insight and knowledge to help you pick your investments. We're very big on tracking the performance of funds and the people who run them so check out our performance section.

At the same time, many of the funds in our carefully chosen Citywire Selection are eligible to be held in an ISA.

As for cash ISAs, there is a wide selection of ISAs available from most banks and building societies, and even some supermarkets and retailers.

To help ensure you earn a competitive interest rate on your savings it is a good idea to use price comparison websites to help you shop around and compare accounts. 

13 comments so far. Why not have your say?


Aug 14, 2010 at 17:54

Want to know the best s&s's ISA , in terms of fees/performance as am thinking of transferring 4 such Isa's.

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Anonymous 1 needed this 'off the record'

Aug 23, 2010 at 13:34

I have worked in charity work for 46 years without pay until this year, just supported from family income. The charity has a lump sum they want to give me on retirement to invest as I wish. Does the charity commission allow charity funds to be used in this way,? Whats the best way to invest for my retirement?

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stan rolls

Nov 17, 2010 at 15:54

I have all my isa money in cash isa,s at present, how do I go about transfering into S&S isa;s and do they have to stay in the stocks I chose indefenatley or can I change to other shares as I feel fit.

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John Howard Norfolk

Feb 24, 2011 at 14:29

Please tell us something we don't know already

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Mary Hamilton (Citywire)

Feb 24, 2011 at 14:52

Hi John, we're hoping this video might shed some light on things for folks who aren't as knowledgeable about ISAs as most of the Citywire regulars. I'm not massively knowledgeable on the subject and it's made things a little clearer for me - especially on the difference between a self-select ISA and one from a high street bank - so hopefully it'll do the same for a few others.

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U gauge

Feb 24, 2011 at 20:29

It would be good to know what the purpose of an ISA is. Is it, as the name implies, to encourage people to save?

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U gauge

Feb 24, 2011 at 20:31

And why are some investments eligible and not others?

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Bernard Crompton

Feb 27, 2011 at 11:50

The purpose of an ISA is an attempt by the Government to encourage people to save. A better incentive would be to reduce as much as possible means tested benefits which are a definite disincentive to save.

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Patrick Rymero

Mar 02, 2011 at 07:23

Absolutely spot on Bernard.

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Dennis .

Apr 08, 2011 at 10:43

There are some subtle omissions in this presentation like the income on dividends is already taxed at source so it doesn't make much difference. Also since you have a CGT allowance of over £10K you need a large active portfolio to make any difference on disposals. Having said that I have ISAs but be aware that they are not all what they seem.

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Apr 08, 2011 at 13:43

A area i am confused is whether you can have an ISA for different years in different banks. I understand that you can only pay into 1 a year and that is your allocation, but if i paid into an ISA in '08/'09 for one bank then opened another for following tax year to pay into another bank is this OK?

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Greg McCann

Nov 07, 2011 at 19:27

I would like to invest 60000 pounds of savings in tax free vehicles that give me a monthly income. I am risk averse. Can someone please advise.

Many thanks.


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- -

Jun 13, 2012 at 12:55

The purpose of an ISA Shares is an attempt by the Government to prop up the stock market. By not allowing you to transfer your stocks and shares to cash you are tapped in the stock market.

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