Individual Savings Accounts (ISAs) were first unveiled by Gordon Brown in 1999 to replace the PEPs and TESSAs introduced in 1986 and 1990. Like their predecessors, an ISA is simply a tax-exempt wrapper for the underlying investments. You can use them to hold cash, shares, bonds, gilts, unit trusts and many other types of investment, and there will be no tax on the income they yield or on any capital gains in the hands of the investor. Any UK resident aged 18 or over can invest in ISAs and you don't even need to declare them on your tax return.
The rules have been simplified since they were first introduced. Mini and Maxi ISAs have now been superseded by Cash ISAs and Stocks & Shares ISAs, which are much easier to understand. The investment limits also went up in 2008, although not nearly as much as they should have done bearing in mind that the previous limits had been frozen for 9 years. You can now invest up to £7,200 per annum in ISAs, of which a maximum of £3,600 can be put in a Cash ISA. For example, you can put £1,000 in a Cash ISA and £6,200 in a Stocks & Shares ISA, but not vice versa. For those aged 50 or over on 6th October 2009, you can now invest up to £10,200 per annum in ISAs of which a maximum of £5,100 can be put in a Cash ISA. These new limits will also apply to those aged under 50 as from 6th April 2010.
To invest in an ISA, you must complete the application (either on paper or on-line) and send your money by 5th April each year. Otherwise you will miss the deadline for that tax year. When a new tax year begins, you can either subscribe more money to an existing ISA or set up a new ISA with a different provider, but bear in mind a new provider will need you to complete an application form, ask for your National Insurance number and check your identity (unless you already have an account with them). You can invest money in an ISA either as lump sums or by monthly instalments depending on the scheme rules. You can also normally withdraw money from a Cash ISA or sell the investments in a Stocks & Shares ISA whenever you want depending on the rules of the scheme, but if you do reduce the value of an ISA you cannot top it up again in order to use your full annual allowance for that tax year.
Since April 2001 it has been possible for 16-17 year olds to open a mini cash ISA. However, these are not tax free if the money used to open them came from their parents. All interest would then be taxed on the parents under the settlements provisions if it exceeds £100 per year. It is also worth noting that ISAs cannot be held in joint names or by companies; they are only available to individual investors.
Even when interest rates are low and stock market conditions volatile, the tax advantages of ISAs are well worth having. A higher-rate tax payer investing the maximum amount in a Cash ISA over the last 10 years would on average have earned £4,800 more interest than if he had kept the money in an ordinary savings account. So investing in an ISA is a no-brainer really. Our advice is to keep thinking of the long-term benefits and use your ISA allowance in full every year.
