Intro to ISAs

Individual Savings Accounts (ISA) are the government’s way of encouraging people to save money by offering tax free benefits. The ISA was launched in 1999 to replace the PEP and TESSAs that were available before it. An ISA is effectively a wrapper that you put around savings and investments to protect the income from them from being liable for taxes. With normal savings and current accounts, you are charged 20% tax on the interest your money earns before you receive it – so while an account might say 5% interest, you will only actually receive 4%. With an ISA you will receive the full benefits of investing your money.

As you may have guessed, there are limits to the amount you can hold inside an ISA wrapper. But the good thing is that these limits are reset every April to coincide with the new tax year. On the 6th April every year, each and every one of us in the UK gets a new allowance that they can use to put money into an ISA. Currently the ISA allowance stands at £7000 each year, but there are limits to the way you can save or invest this amount. The two types of ISA are outlined below:

Maxi ISA

If you choose a Maxi ISA, you will have a single account with one provider. Of the £7000 allowance, you are able to hold up to a maximum of £3000 as cash, and the rest you can hold as stocks and shares. If you wish, you could use the whole £7000 to hold stocks and shares. If you are aiming to invest over £4000 in a tax year in stocks and shares, this is the best option for you.

Mini ISAs

The other option is to take out two separate mini ISAs – a cash mini ISA, and a stocks and shares mini ISA. This enables you to take out the two different accounts with two different providers. If the cash mini ISA provider isn’t very competitive for stocks and shares, just take your stocks and shares mini ISA out with another provider. The only downside with choosing mini ISAs is that while the cash part limit is still £3000, the stocks and shares part can only hold a maximum of £4000. So if you want to hold more than £4000 in shares, the only option you have is the maxi ISA.

It is important to decide early on which is the best option for you, as you may only hold one type of ISA per year, either a maxi or mini ISAs. Cash mini ISAs are the most popular option with nearly 9m of us taking one out in the 2003/04 tax year. Of those 9m, only around 1m also took out a mini shares ISA as well. The maxi ISA route was chosen by around 1.5m people.

Which ever route you do choose each year, it is important to remember that your allowance is used up the first time you pay money into an ISA. If you paid in £3000 to a cash mini ISA, you can’t then take it out and expect to be able to put it back into the ISA in the same tax year, your allowance was used up the first time you paid it in – you would have to wait till April 6th before you could put your money back in.