Confused about ISAs? Here’s a quick rundown on what they are and what types are available to you.
What is an ISA?
In a nutshell, an Individual Savings Account (ISA) is a tax-free way of saving money.
With a normal bank or building society savings account, you pay tax on any interest that you earn.
With an ISA, you don’t pay any tax on the interest or on any capital gains you make.
The catch is that there is a limit on how much money you can put in each year.
The current cap for ISAs is £15,000 per year. This will go up to £15,240 in April 2015.
What kinds of ISA are available?
There are two types of ISA, and you can use either or both at the same time:
The first is a cash ISA. Here you can transfer money from your normal savings account and all of your interest is tax-free.
Most cash ISAs let you withdraw your money at any time, but you’re only allowed to deposit up to £15,000 in a single year.
So if you save £10,000 and take £1,000, you can still only save another £5,000 that year.
Any UK resident over the age of 16 can open a cash ISA.
The other kind is a stocks and shares ISA. This lets you add shares in companies, bonds and investment funds without paying any tax on the income you get.
This is a riskier option than a cash ISA because the money you get back depends on how the stocks perform.
You’re also often tied into a stocks and shares ISA for a set period of time, so you can’t withdraw your money whenever you like.
Any UK resident over the age of 18 can open a stocks and shares ISA.
You can save using either or both methods if you like, so long as the total amount saved doesn’t go above £15,000 in a tax year.
What about Junior ISAs?
If you’re looking to set up an ISA for children, then a junior ISA might be for you.
Junior ISAs work the same way as regular ISAs, with a few exceptions.
The savings cap for a junior ISA is £4,000 rather than £15,000, and you can’t open one if you already have a child trust fund.
The limit will rise to £4,080 in April 2015.
Am I stuck with the same bank as my savings account?
Not at all: your new ISA provider should be able to transfer your money from your old ISA to the new – you’ll just need to fill in a form to request it.
This is the best way to do things.
If you try to withdraw all your money and try to transfer it yourself, you lose the tax-free benefits.
It should take no longer than 15 days to get a cash ISA transferred to the new provider.