What is an ISA and how do I get one?

Your guide to the individual savings account (ISA) and how to find the best ISA for you, with information on the cash ISA, stocks and shares ISA and transfer ISAs.

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by Victoria Bischoff on Feb 01, 2012 at 12:04

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The individual savings account (ISA) is one of the most popular and tax-efficient ways to save.

What is an ISA?

An ISA (individual savings account) is a tax-free savings account designed to give you 100% of the interest or income you earn on your money.

Basic-rate tax payers usually lose 20% of the interest they make on their cash 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 ISA are there?

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

The cash ISA works in the same way as normal savings accounts. 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.

Children under the age of 16, however, are now able to save in a Junior ISA. We will explain more about this type of ISA later.

How much can I invest?

As of April 2012, the ISA limit will increase from £10,680 to £11,280 per tax year. And this limit will continue to increase in line with inflation, as measured by the consumer price index (CPI), every 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 £11,680 ISA limit you can invest in an ISA at any point during the year – perfect for people aiming to squirrel away a fiver a day.