An Individual Savings Account is one that allows an individual to save his/her money without taxing the returns on the cash or investment. The ISA is offered by the UK Government working with most banks and credit institutions. The requirement for an ISA is that you have to deposit or invest a certain amount of money into an account within a tax year. This amount that is to be deposited is the cash ISA allowance. The cash ISA allowance may from tax year to tax year but that does not affect the interest rates set by the bank or credit institution.
The amount that is to be deposited can be deposited into a number of multiple ISA accounts collectively, or into each account separately. The money can also be deposited all at once or over a period of time without any fixed charges on the deposit, depending on the type of ISA account.
The current cash ISA allowance is £20,000 for the 2017/18 tax year. The money is to be deposited by an individual, independent of any withstanding withdrawals on the account. If a withdrawal is made on any ISA, the payments on the ISA do not amount to the allowance. Instead, the deposited amount only goes to settle the withdrawal deficit. If however, the money is paid in excess, the excess amount can then be added up to the allowance.
The allowance highlights the maximum amount that an individual can save into an account. The savings do not necessarily have to be in cash; they can also be in form of share and stocks.
Account types and how they relate to an allowance
Basically, there are three ISA types that you can invest your money, shares or stocks into. These include:
- Cash ISA
- This is where the cash ISA allowance applies. The investment is made through cash deposited into the account. Investment returns on this account are never taxed.
- Investment or innovative finance ISA
- This is an account that allows for investment in stocks, shares or cash. A cash ISA allowance could apply in this account.
- Shares or stocks ISA
- In this ISA, investment is made in terms of stocks or shares. The amount of stock or share investment made must amount to the annual allowance limit. The shares or stocks are not made in cash terms but returns on investments are in cash.
Though the allowance is fixed for each individual and credit institution, the returns on investment vary depending on the bank's or credit institution's rates. The rates may also vary from one account type to the other.