What is an Individual Savings Account (ISA)?
An ISA is a Government-approved saving plan, which allows investors to save money without having to pay tax on any interest, dividends or bonuses that the fund earns, or any capital gain that it makes. Unless you are a non-taxpayer, this is not the case with ordinary savings and investment products.
ISAs were launched by the Government in April 1999 for an initial 10-year period, as the successor to Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs). The period has now been extended indefinitely.
Eligible investments can be cash, equities (stocks and shares), some life insurance products, or a combination of these. This includes funds that invest in these instruments. Not all investment companies offer the full range of ISA-eligible products, but their literature will be specific about what is available.
It is possible to invest a lump sum, a series of lump sums or regular savings. The types and minimum amount of acceptable investment vary, and are determined by individual providers. You can take your money out any time you like, without losing the tax reliefs.
Broadly, Stocks and Shares ISAs should be treated as longer-term investments since they can fluctuate in value over short periods, while Cash ISAs may be suitable for shorter-term savings. In each case money can be withdrawn, but it is still considered to have counted towards the maximum annual investment limit. Therefore it cannot be replaced in the same tax year if the full subscription limit has been used.
In 2007, the Government announced that the ISA scheme is to continue indefinitely into the future. The Finance Act 2007 also introduced changes to the ISA rules, effective from the 6th April 2008, and further changes to the ISA limits were set out in the 2009 Budget, details of these can be seen in the sections that follow.