In the United Kingdom, an Individual Savings Account is not just any account you put your savings in, but a very specific retail investment arrangement that qualifies for a favourable tax status. Similar accounts exists in other countries as well, such as the Tax-Free Savings account in Canada.
Your Individual Savings Account is exempt from income tax and capital gains tax on investment returns. Also, no tax is payable when you withdraw money from your Individual Savings Account, regardless of how large the amount is. You can withdraw your money at any time.
Your Individual Savings Account is not just an account that you can put cash into; it is also an account that you can use to hold a wide range of other investments. With few exceptions, your contributions must however be made in cash. One exception from this rule are contributions made through an employee share ownership plan.
About the ISA
The Individual Savings Account (ISA) was introduced on 6 April 1999, replacing the older Tax-Exempt Special Savings Account (TESSA) and the Personal Equity Plan (PEP).
The Individual Savings Account is not a pension product, but can of course be used to save up for retirement.
Payment into your Individual Savings Account are made with after tax income.
You can not use the funds in your Individual Savings Account as security for a loan.
When the Individual Savings Account (ISA) was introduced back in 1999, it came with quite a lot of restrictions. In July 2014, many of there restrictions were drastically relaxed.
Tax benefits of an ISA
- You do not pay tax in any of the income your receive from your ISA cash and ISA stocks and shares accounts. This include incomes such as interests, dividends and bonuses.
- You do not pay tax on capital gains on your ISA investments.
- Insurers do not have to make any tax payments on income and capital gains on investments used to back your ISA life insurance policies.
- When an ISA life insurance policy pays out, it isn’t taxed.
- You do not have to declare income and capital gains from ISA accounts.
- You do not even have to tell your tax office that you have ISA accounts.
As mentioned above, you can withdraw money from your ISA:s at any time without losing your tax exceptions. It should be noted however that some ISA manager offer ISA accounts that run for a fixed period or require notice of withdrawal. Making an early withdrawal can cause you to lose interests, bonuses and similar perks. For life insurance policies, a penalty may be attached to surrendering the policy early.
- An Adult ISA is available to UK residents, and certain other individuals, from the age of 16, provided that they have a National Insurance number. Until you turn 18 however, you are only allowed to use an ISA cash, not an ISA stocks and shares. For stocks and shares, you can use the Junior ISA instead.
- A Junior ISA is available to UK residents, and certain other individuals, under the age of 18.
Residency requirement for adult ISA
In order to have an adult ISA, you need to be UK resident, or a Crown employee (e.g. a diplomat or member of the armed forces). If you are the spouse or civil partner or a qualifying individual you can also have and adult ISA.
ISA cash & ISA stocks and shares
There are two types of ISA:
- ISA cash
- ISA stocks and shares
You can have both at the same time if you want to, and you can put money into both during the same tax year.
To set up an ISA, you need to contact an ISA manager. There are many different ISA managers to chose among. Some are banks, investment trust companies or fund stockbrokers, while others are building societies, supermarkets, retailers, friendly societies or insurance companies. Please note that not every ISA manager will offer both ISA cash and ISA stocks and shares.
You can only put money into one ISA cash and one ISA stocks and shares during a tax year. You will however be allowed fill different ISA cash accounts and different ISA stocks and shares accounts during different years. There is no limit to the number of different ISA:s you can hold with different ISA managers over time.
Filling your ISA:s
At the time of writing, the current cap for how much you are allowed to put into your ISA:s are £15,000 in total per tax year. This number can change from year to year, so always check with HM Revenue & Customs to make sure you get current information.
It is up to you to decide who to spread your payments. You can for instance elect to put £7,500 into your cash ISA and £7,500 into your stocks and shares ISA, or the full £15,000 into your cash ISA, or £1,000 into your cash ISA and £14,000 into your stocks and shares ISA, and so on.
If, you by mistake, exceed the £15,000 cap you are not entitled to any tax relief on income generated by the excess payments.
Withdrawals do not counteract deposits to keep you under the cap
If you withdraw from your ISA and then later puts the money back, in the same tax year, the new deposit will count towards the cap.
You make a £12,000 deposit in July. A few weeks later, you make a £10,000 withdrawal. The following month, you wish to replenish your ISA again, but you can only put back £3,000 since you have already made a £12,000 deposit during that tax year.