What is an ISA?
An ISA or Individual Savings Account is a tax efficient savings/investment vehicle.
An ISA is just like any other form of investment with certain tax advantages. All investments whether it be an ISA, a pension, a LISA, a bond, a general investment account all work in much the same way apart from their tax status. This is why they are often called “tax wrappers”.
Whatever tax wrapper you put your money into, it will be “invested” in much the same places whether it be cash, government or company loans, commercial property or company shares. Your money will be “pooled” with other investors’ into funds that hold a mixture of these “assets” based on your attitude to risk, term of investment and a number of other factors.
In essence, you could hold the same funds within your ISA as in your pension.
What does the ISA tax wrapper mean for your investment?
Your investments grow free from tax
Within an ISA there is no tax on income or interest. What does this mean?
Any growth within an ISA is not taxed*
There is no Capital Gains Tax on ISAs
This means that when you sell funds within your ISA, any gains made from the proceeds of the sale will not be taxed
Any income or withdrawals taken from an ISA are tax free
This means that when you take money out of your ISA, there is no tax to pay
ISAs do not need to be included on your tax return
Due to the tax advantages of an ISA, there is a restriction on the amount that can be paid in each tax year – currently £20,000 (2017/18). This can be held in cash or Stocks and Shares or a mixture of both.
It should be noted that ISAs do form part of the deceased’s Estate for Inheritance Tax purposes which means that money held within an ISA could be subject to Inheritance Tax. This is unless the ISA is invested in AIM shares that have been held for 2 years and are held at the date of death.
Age limits and Junior ISAs
ISAs can be held for any period of time – there are no restrictions on when you can access your money (unless you invest in a fixed term deposit within an ISA). Any UK resident aged 18 or over (16 for Cash ISAs) can invest into an ISA and there is no upper age limit.
There are also junior ISAs for those under 18 years. This could be a Cash Junior ISA or a Stocks and Shares Junior ISA. The maximum that can be invested into a Junior ISA is £4,128. However, a little known fact is that 16-18 year olds can open a Cash ISA and a junior ISA in the same year, meaning they’re able to save up to £24,128 a year tax-free.
Tax rules, rates and allowances are all subject to change and are dependent on individual circumstances. The Financial Conduct Authority does not regulate tax advice and some forms of offshore investments. The value of investments and the income from them can fall as well as rise and you may not get back the full amount you invested
* “Net” funds can be held within an ISA, if this is the case, income on dividends will still be taxed at 10% – this cannot be reclaimed. Most providers have gross funds in which the income is not taxed.