What is an ISA
ISA stands for Individual Savings Account, and is a government designed scheme aimed at encouraging more people to put money away in savings. The ISA is a particularly attractive option for saving in the current climate of low interest rates, as money invested in a ISA is basically tax free. This means that any interest, or gains made on money invested in an ISA, will be free from personal income and capital gains tax. Some ISA products carry their own underlying tax which cannot be avoided, and it is best to contact a provider like Legal & General to discuss the finer points of a particular ISA when you are ready to invest.
There is a limit on the amount of money that can be invested in an ISA, and so a limit to the tax free gains, and this limit is annual – the last day for investing money in an ISA under the limit for this year is the 5th April 2010. The upper limit for investment at the moment £7,200 for most people (those over 50 currently have a higher investment limit). In April 2010, total ISA limit will increase to £10,200 per person per year, for everyone over the age of 18 (18 is the minimum age for investing in an ISA). This increase will match the higher allowance enjoyed by the over 50’s, which was granted in October 2009.
As the name suggests, the ISA is a financial product for individual investment – an ISA cannot be held jointly. There are two basic forms of ISA; the cash ISA, and stocks and share ISAs. The overall limit for investment can combine both types of ISA, and there are individual limits for both. The cash ISA allowance is currently £3,600, and this will rise to £5,100 in April 2010. The limit for a stocks and shares ISA is £7,200 at the moment – meaning that the entire annual allowance can be invested in a stocks and shares ISA. Similarly, this allowance will rise to £10,200 in April 2010 – this is also the maximum ISA allowance for 2010 – 2011.
A cash ISA is the safest investment option, as it is basically a tax free savings account, with a clearly stated fixed rate of interest. A stocks and shares ISA forms an investment portfolio which will hopefully increase in value; but before investing be aware that this type of investment can also decrease in value given unfavourable movements in the stock market.