ISA Guide - A helpful guide to tax efficient savings

What is an ISA and who can have one?

An ISA is a tax efficient way to save and stands for Individual Savings Account. An ISA lets you pay little or no tax on the interest your savings and investments make.

There are two main types of ISA:

• Cash ISAs, which are classed as tax-free (i.e. you are not taxed on the interest earned on UK income)
• Stocks and shares ISAs, which are classed as tax efficient.

Paying money into an ISA is called a subscription. You can subscribe to one cash ISA and one stocks and shares ISA in every tax year, and there’s a maximum allowance you can pay into each one.
ISAs are a good idea whatever your savings goal. With certain types of cash ISAs, you have instant access to your money, making it a flexible way to plan your finances.
Having an ISA is also a great way to save tax efficiently as an additional part of your long term financial planning. Stocks and shares ISAs are intended as a medium to long term investment which means they should be held for at least 5 years.
It’s important to remember that ISA allowance limits apply to everyone on an individual basis, so if you’re married or in a relationship, you can both hold your own ISA, each with the full allowance.
 

To subscribe to an ISA:

• You must be aged 16 or over to hold a cash ISA, or 18 or over to hold a
  stocks and shares ISA
• You must be a resident or ordinarily resident in the UK
• You can only subscribe to one cash ISA in a tax year, which runs from 6 April
  in one year to 5 April the next year
• You can subscribe to one cash ISA and one stocks and shares ISA in a tax year, but there are limits to how much you can save in each ISA – see the following section ‘How much can I put into an ISA’

 How much can I put into an ISA?

As ISA savings are tax efficient, there’s a yearly limit on the amount you can put in. for the tax year from 6 April 2012 to 5 April 2013, the overall limit is £11,280. you can use this allowance in a variety of ways.

 

With an ISA allowance of £11,280, you can:

 

Save up to £5,640 in a cash ISA
or
Save up to £11,280 in a stocks and shares ISA
or
Save up to £5,640 in a cash ISA and put the remainder of the £11,280 allowance into a stocks and shares ISA

If you put less than the full allowance into a cash ISA, you can use the rest of that limit to add into your stocks and shares ISA limit. For example, if you only choose to put £2,000 into a cash ISA, you can put up to £9,280 into a stocks and shares ISA. For the 2012/2013 tax year, the ISA allowance increases to £11,280. This limit may change from time to time.

Making withdrawals

f you withdraw money from your ISA, you cannot reinvest it in the same tax year if your total deposits will exceed your yearly allowance.

For example:

Your Cash ISA yearly limit	£5,640
You pay into your Cash ISA	£2,100
Your remaining tax-free allowance is	£3,540
You then make a withdrawal of	£500
Your remaining tax-free allowance is still	£3,540
Overall possible saving by end of tax year	£5,140