What is an ISA?

Holly Thomas / 19 February 2015 ( 05 April 2017 )

If you want your savings or investments to grow at the best possible rate then an ISA – an individual savings account - can help. These are savings and investment vehicles where your money can grow largely free from tax.

ISAs were first introduced in 1999 to encourage people to save. The attraction is that money grows free from income tax deductions. Interest paid on cash is not taxed. Growth on money invested in the stock market, through an ISA, is tax efficient.

Income earned from any shares investments is taxed at 10%, so while basic-rate taxpayers would pay the same outside an ISA, this is a significant saving for higher and additional-rate taxpayers who would otherwise pay higher rates of 32.5% and 37.5% respectively.

Can you inherit an ISA from your spouse?

Tax efficient saving

Even better, you escape capital gains tax when you come to cash in your investment. You don’t even have to include savings held in an ISA on your tax return.

Money invested wisely in ISAs will grow faster than in the best standard savings account because no tax is deducted.

Even with low interest rates these days, it is worth putting your money into an ISA so that when rates do eventually rise, that money can grow tax-efficiently.

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What are the ISA rules?

There are a few rules you have to adhere to, in order to keep hold of the precious tax shelter.

From April 2017, you can invest up to £20,000 in an ISA this tax year. You can put all of that into a cash ISA or an investment ISA or split it across the two. But if you try and pay over the limit in, your money will be returned.

Any ISA allowance you don’t use cannot be carried over. And if you withdraw any money, you can’t replace it, unless you haven’t reached the limit.

You can open one cash ISA and one investment ISA per year. However, if you open a cash ISA and later in the year see an account with a better rate you can move your money, as long as you adhere to the rules.

The new account must accept transfers from other ISAs, and you must then move all of your money from the original ISA into the new account, closing the old one.

Read more about transferring ISAs

ISAs for kids

It is not just grown-ups who can use ISAs to shelter their savings. The Junior ISA offers the same tax perks as an adult ISA, except it is available to children up to the age of 18. You can save or invest £4,080 in a Junior ISA for children or grandchildren.

The exception is children who were born between September 1, 2002 and January 2, 2011, who are entitled to child trust funds instead. Since April 2015, parents are able to convert CTFs to Junior ISAs, which are much cheaper to run with more choice for investing.

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The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.