Home > Investment > What Can an ISA do for Me?

What Can an ISA do for Me?

By: J.A.J Aaronson - Updated: 24 Oct 2012 | comments*Discuss
Isa Mini Maxi Tessa Savings Interest Tax

Individual Savings Accounts, or ISAs, have become increasingly popular since their introduction in 1999. These accounts were designed to replace the often-criticised PEPs and TESSAs which had been developed during the previous government.An ISA is essentially a tax-free savings account. Two different types are available, the Mini and the Maxi ISA, each with different limits to how much you can save (known as the subscription limits). You can invest up to £5,100 per tax year in a cash ISA, and up to £10,200 in a stocks and shares ISA, for the 2010-11 tax year. There is no minimum investment and, as a result, these are a considerably more attractive proposition for the majority of small investors than PEPs or TESSAs, which set minimum investment limits at £3,000. ISA limits will rise with inflation as of 2010.

Two-part Savings

ISA investments can be made up of two different elements. The most widely used of these is the cash part. Most people use ISAs simply as a fairly high-interest cash savings account. This is particularly useful for those who have surplus finances but could need to get to their cash quickly - many banks now offer instant access cash ISAs, for which they may even offer cash cards, enabling you to get to your cash straight away. You should remember, however, that the number of withdrawals you make does not affect the subscription limit.

The second part of the ISA scheme is the stocks and shares element. A proportion of your ISA investment can be made up of shares and public debts such as bonds. Although the interest rate granted on most ISAs is directly related to the rate of inflation, the value of stocks and shares can, of course, fluctuate. As a result, if you choose to use this part of the ISA, yours could be a high-risk investment.

Tax Free

The great selling point of the ISA is that the taxman can't get to your investment. You will pay no tax on income or capital gains. So, as well as not paying income tax on the interest you make, you would also pay no tax on share dividends or capital growth of your shares. This makes ISAs a particularly attractive proposition for those who are already thinking of investing in shares through a unit trust, in which their investment is combined with that of many others. This is the way most high-street share options on ISAs operate.

In 1999, the Government introduced the Charges, Access and Terms, or CAT, standards. This voluntary code allowed ISA providers to declare their willingness to meet keep charges to a minimum, allow quick access to cash, and fix their interest rates to inflation. The majority of financial institutions providing ISAs have now either signed up to the terms, or follow them without being an official signatory. Generally, you should not invest in an ISA which does not grant the terms outlined in the CAT guidelines.

In conclusion, an ISA is an excellent option for those with a fairly small sum to invest, as it offers a better net interest rate than the vast majority of other saving options. Similarly, an ISA represents an excellent way of keeping your first £5,100 worth of savings tax-free, if you have more than this sum to invest. If, however, you are looking for large short-term gains, the stocks and shares option may not be ideal for you. In these cases, you might consider a managed trading account with a specialist provider, which is covered in an article elsewhere on this site.

You might also like...
Share Your Story, Join the Discussion or Seek Advice..
Why not be the first to leave a comment for discussion, ask for advice or share your story...

If you'd like to ask a question one of our experts (workload permitting) or a helpful reader hopefully can help you... We also love comments and interesting stories

(never shown)
(never shown)
(never shown)
(never shown)
Enter word:
Latest Comments
  • Howie
    Re: A Guide to Unemployment Benefits
    On 15 July I have to go to court. I may be looking at a driving ban. If I am (hopefully I won't be) will I be allowed to…
    10 June 2019
  • Crazydiamond
    Re: What is SERPS and What Was 'Contracting Out' ?
    Hi i took the serps option in 1988, I am now 58 but unable to trace this pension, can anyone help me in…
    29 May 2019
  • Lolly
    Re: A Guide to Unemployment Benefits
    Hi i am currently working in the care sector my age is 61 i have been trying to get varicose viens removed for 7 years plus…
    16 May 2019
  • Dave
    Re: Taxation for the Self-Employed
    I am PAYE and Self Employed through CIS. I earned £41k in PAYE and a mere £3500 self employed, (before tax) I have a…
    24 April 2019
  • Stanharris
    Re: Renegotiating Your Loans
    Thanks for sharing a valuable information. It is really informative and helpful. the information that you have shared is really useful.…
    4 April 2019
  • Oggy
    Re: Taxation for the Self-Employed
    I’m a construction worker on cis can I claim back my 20% tax back on my first 12k tax is deducted before I’m paid although I’m…
    1 April 2019
  • Caz
    Re: How Much Tax do I Have to Pay?
    Iv just started working for an agency I will be played weekly they not taken out tax and national insurance I have to have my…
    23 March 2019
  • SylviaBlood
    Re: A Guide to Unemployment Benefits
    an you help me pls I had operation on my kidney followed by chest infection I then went profound deaf had cochlear implant…
    19 February 2019
  • sylv
    Re: A Guide to Unemployment Benefits
    i returnee red to work after 2operations I was on ESA support group con based. I went to work I had my hours cut but unable…
    19 February 2019
  • Jax
    Re: How Much Tax do I Have to Pay?
    I earned £924 for working 99 hours last month yet between tax and national insurance Im just bringing home £690 is this right?
    24 January 2019