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Individual Savings Accounts (ISAs)

This information applies to England, Wales, Scotland and Northern Ireland

What is an ISA

If you are a UK taxpayer you will have to pay tax on the money (interest) your savings earn.

If you are:

  • a savings rate taxpayer, you will pay 10 per cent
  • a basic rate taxpayer you will pay 20 per cent
  • a higher rate tax payer you will pay 40 per cent tax
  • an additional rate taxpayer, you will pay 50 per cent.

For more information about income tax rates, see Income tax rates.

However, there are savings and investment plans which allow you to save a certain amount of money each year where the income you earn from them is tax free.

They are called Individual Savings Accounts or ISAs. ISAs are a place where you can put a range of savings and investments.

However, you don't pay any tax on the interest or income you earn. There are two types of ISA:

  • a cash ISA
  • an investment ISA. Investment ISAs are also known as stocks and shares ISAs.

All the interest you earn from a cash ISA is tax free.

With an investment ISA, most of the income you earn from it will be tax free, but if you choose a share-based investment, the money you make on the shares is taxed.

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Who can save in an ISA?

You have be resident in the UK to be able to open an ISA.

You can open a cash ISA from age 16 or over and you can open an investment ISA from aged 18 or over.

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What’s the difference between a cash ISA and an investment ISA?

Cash ISAs are a good way to save for the short-term. This is normally less than five years. They usually offer good rates of interest compared to bank and building society accounts with the added bonus that you don’t pay tax on the interest.

Investment ISAs are for stockmarket investments. They are worth considering if you want to save for longer than five years and are willing to take a risk with your money.

Investing in the stockmarket is a riskier way to save because it's possible to lose money rather than make it. However, the longer you invest for, the more likely you are to make more money than if you had saved with a bank or building society. This is called giving you a higher return.

For more information about investing in the stockmarket, see Investing in the stockmarket.

You can switch the money you have in a cash ISA into an investment ISA but you can’t put money from an investment ISA into a cash ISA. So if you're thinking of switching to an investment ISA, remember you won’t be able to put it back into a cash ISA if your investment does not do as well as you hoped.

If you want to switch to a different ISA, your ISA provider has to do that for you and may charge you.

If you are interested in putting your money into an investment ISA, you might want to get help from an independent financial adviser. They will help you to decide whether this is the right choice for you.

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How much can you put into an ISA?

You can put £11,280 into ISAs. Up to £5,640 of this can go into a cash ISA. If you don’t pay into a cash ISA, you can put your entire limit into an Investment ISA.

You can’t carry over any of your unused limit from one tax year to the next. You can take out your money at any time you want. However, if you take out any money within the tax year, you can’t replace it until the new tax year starts and you qualify for a new limit.

You can save and invest in one cash ISA and one investment ISA each tax year and they don’t have to be with the same provider. However, you can’t take out two cash ISAs or two investment ISAs during the same tax year.

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Capital Gains Tax and ISAs

You can use an ISA to avoid paying Capital Gains Tax (CGT). CGT is a tax the government charges on some profits you make from savings and investments.

If you make profits of more than £11,200 from the sale of shares and certain other assets in the tax year 2012/13 you would normally have to pay CGT. However, you do not have to pay any CGT on profits from an ISA.

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Use your tax allowances

If you live with a partner or are married, you both have tax allowances. This is the amount of money the government lets you earn before you have to start paying tax. If one of you pays tax and the other doesn’t, or if only one of you pays tax at the higher rate, it is worth using up your ISA entitlements and ensure other savings are in the name of the account holder who pays the least tax.

For more information about tax allowances, see Income tax allowances and amounts.

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Other ways to save tax free

If you are looking for other tax free ways to save, the government backed National Savings and Investments (NS&I) offer a series of index-linked and fixed interest savings certificates. You can save between £100 and £15,000 in each issue and there are several issues a year. To find out more about NS&I go to www.nsandi.com. You should always compare National Savings products interest rates with the interest rates of other products on offer.

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Where can you get an ISA?

You can get an ISA through:

All ISA providers have to be regulated by the Financial Services Authority (FSA). This is the government financial watchdog.

To find out more about cash ISAs go to:

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Further help

On Adviceguide

National Savings and Investments

National Savings and Investments offer a number of financial products which are guaranteed by the Government. They are available through the Post Office, online and by phone. For more information, go to: www.nsandi.com.

Independent financial advice

For help in finding an independent financial adviser, contact one of the following organisations:

Independent Financial Promotions (IFAP)

Website: www.unbiased.co.uk

Institute of Financial Planning (IFP)

Tel: 0117 945 2470
E-mail: enquiries@financialplanning.org.uk
Website: www.financialplanning.org.uk

Personal Finance Society (PFS)

E-mail: customer.serv@thepfs.org
Website: www.findanadviser.org

Moneysavingexpert website

The money saving expert website has lots of useful financial information, including price comparison tables for different savings accounts. Go to: www.moneysavingexpert.com.

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