Individual Savings Accounts (ISAs) were introduced in April 1999 to replace old style PEPs (Personal Equity Plans) and Tessas (Tax-Exempt Special Savings Accounts). Simply put, an ISA is just a tax-free wrapper into which you can place either cash or shares. If you have savings or investments then an ISA is an essential component within any portfolio as it saves tax and therefore increases returns.
Stocks and Shares ISAs
Share based investments in various forms are ISA-able. Shares in individual companies may be placed inside what’s called a self-select ISA, which are usually managed by stockbrokers. However, a more common use of the shares allowance is for collective investment vehicles like unit trusts, OEICs or investment trusts. These are pooled investments where a fund manager picks a selection of shares based on geographic or sector criteria and the value of the investment depends on the collective performance of the shares picked. As well as holding shares (equities), stocks & shares ISAs can also invest in property funds and bonds (such as gilts, corporate bonds and high yield bonds).
Placing investments inside an ISA wrapper provides two potential tax advantages. The main benefit is that any capital growth can be returned to you free from capital gains tax. If you fund invests in bonds then the fund manager can also reclaim all tax paid on the interest yield.
Cash ISAs are simply savings accounts where the interest isn’t taxed. They mainly offer instant access to your money but some Fixed Term Cash ISAs are also available where withdrawals will be restricted.
To be eligible for an ISA you have to be at least 16 years old for a Cash ISA and 18 years old for a Stocks & Shares ISA. From 1 July 2014, following reforms to the ISA system announced in the March 2014 Budget you will be allowed to save your entire “New ISA” (NISA) allowance in cash or stocks and shares – or any combination of the two. In the current tax-year, 2017/18, you can invest up to £20,000 into an ISA.