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What Exactly Is An ISA?

How does it work

What Exactly Is An ISA?

Understanding the foundation of Individual Savings Accounts

Individual Savings Accounts, more commonly referred to as ISAs, debuted in 1999 and offer tax incentives to encourage UK residents to save. These savings and investment 'vehicles' offer a variety of options and benefits, but they also come with their share of rules and regulations. To ensure you benefit from the full advantages of these accounts, it's important to understand exactly how ISAs work and the rules governing them before you open one.

What is an ISA?

Many financial experts recommend that ISA should be a first port of call to individuals who want to put money into savings or investments. These savings vehicles provide more in the way of tax-efficient benefits than most others types of accounts, giving the account holder a greater rate of return on their initial deposit.

There are two types of ISA - cash ISAs and investment ISAs (also known as stocks and shares ISAs). Cash ISAs offer tax-free interest, while investment ISAs offer returns that are exempt from capital gains tax.

Who can contribute to an ISA?

Any UK resident over the age of 16 can open and contribute to an ISA. However, account holders under 18 are only able to open cash ISAs; stocks and shares ISAs are not available to this age group.

Account holders 18 and older are allowed to open one stocks and shares ISA and one cash ISA each year. As the name suggests, ISAs are individual accounts, which means that joint ownership is not available.

What are the contribution limits?

Because of the tax benefits ISAs provide, the amount you can contribute into an ISA is limited each year. Check the current limit here:

Can money be withdrawn from an ISA?

Money can be taken from an ISA at any time. However, there can sometimes be drawbacks to doing so. Withdrawing money from an ISA does not change the contribution limits for that year. So, if you've invested the full amount allowed in your ISA for the year and then withdraw £1,000, you cannot then put that money back into the ISA during the current taxable year, because you have already reached your contribution limit with your initial deposits.

An ISA can be a sensible choice for savers and investors alike. Whether you're looking for a tax-efficient way to put cash aside for the future, or looking to invest without paying capital gains tax, an ISA may be the perfect option for you.

Read more here: The Comprehensive Guide to ISAs

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Latest News

How much can I pay into an ISA?

21st March 2019

Each tax year, there's a limit set by the government to the amount you can save and invest in ISAs: your “annual ISA allowance”. The allowances are intended to reward savers and encourage us to invest more to support our future retirements, without creating a tax haven that can be taken advantage of by very wealthy individuals who just want to avoid paying tax.

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