A number of important changes to the ISA regime came into effect from 6 April 2010. These changes were designed to present ISAs in a simpler and more flexible way for investors.
ISA investors are able to invest in up to two separate ISAs each year: a Cash ISA and a Stocks and Shares ISA.
- Existing PEP investments have now automatically become ISAs; the changes align the rules for the two schemes.
- For 2013/14 the annual ISA allowance is £11,520.
- The entire £11,520 can be invested in a Stocks and Shares ISA with one provider.
- Up to £5,760 of the allowance can be invested in a Cash ISA with one provider whilst the remainder can be invested in a Stocks and Shares ISA.
- It is now possible to transfer new and existing Cash ISAs to a Stocks and Shares ISA.
- ISAs will remain available indefinitely.
What is an ISA?
Any individual who is an income tax payer and has some money to save or invest, should know about Individual Savings Accounts (ISAs). Available since April 1999, ISAs offer an attractive tax-efficient investment to anyone aged 18 or over (16 or over for cash ISAs).
With standard bank and building society savings accounts taxpayers normally have to pay tax on any interest earned on their money. The tax is deducted from the interest before it is paid out, reducing the amount received. Similarly, tax must be paid on the income and profits made from investments in the stock market, either directly or through unit trusts and OEICs.
ISAs, however, serve as a kind of 'wrapper' to protect savings from tax, allowing individuals to invest a maximum of £11,520 (by way of regular or single savings amounts) each tax year in a range of tax efficient savings and investments and pay no personal tax at all on the income and/or profits received, however it is not possible for ISA managers to recover tax deducted at source from UK dividend income.
The big ISA benefits are:
- No personal tax (income or capital gains) on any investments in an ISA.
- Income and gains from ISAs do not need to be included in tax returns.
- Money can be withdrawn from an ISA at any time without losing the tax breaks.
The basics of how ISAs work
There are two types of ISA from April 6th 2010 (Cash and Stocks and Shares) which may contain one or more of the following components:
- Stocks and shares, in the form of either individual shares or bonds, or pooled investments such as open-ended investment funds, investment trusts or life assurance investments.
- Cash, usually containing a bank or building society savings account.
You can have 1 cash ISA up to the limit of £5,760 with one provider with the option of investing the remaining allowance of £5,760 into a Stocks and Shares ISA.
Stocks and Shares ISA
With a Stocks and Shares ISA you can invest the full £11,520 with one provider. The Stocks and Shares ISA must include a stocks and shares element.
The Government has said that the ISA will be available indefinitely.
To be eligible to invest in an ISA, an investor must be an individual (i.e. not a company or trustee) who is 18 years of age or over (16 and 17 year olds are able to invest up to £5,640 in a cash ISA), and who is resident and ordinarily resident in the UK (or is a Crown servant serving overseas or the spouse of such an individual who accompanies their spouse abroad).
When an individual ceases to be eligible to invest in an ISA, any existing ISAs will continue to be exempt from UK tax, but future contributions to regular investment ISAs must be terminated and no further single contributions may be made.
A husband and wife are treated as separate individuals so that although joint ownership of an ISA is prohibited each may fully subscribe to one in their own name.