New to ISAs?

What is an ISA?

Put simply, an ISA is an individual savings account that has special tax advantages. The ISA itself is simply a wrapper within which you can hold shares, funds (unit trusts and OEICs) and cash investments.

ISAs are designed to be a flexible way of earning a tax-efficient return on your investments. Because they have special tax privileges there is a limit to the amount you can invest annually in cash, shares, and/or funds. You can, however, invest your annual allowance with one or several providers.

What is an ISA 'wrapper'?

In this context, a 'wrapper' is really just another word for a container.

Generally speaking, all the investments you hold inside a wrapper are treated in a particular way. So, if the wrapper has special tax advantages, all the investments inside it would share those tax advantages. (The same would apply to a pension wrapper, for example.)

So, when people talk about 'wrapped' or 'unwrapped' investments, 'unwrapped' investments are just ordinary investments without any special tax treatment.

How does an ISA benefit me?

ISAs help you protect your investment returns from tax, particularly if you are a higher rate tax payer. Although the exact rules around the tax benefits have changed over the years, this is how they stand for your 2008/9 allowance:

Capital gains tax

- all your ISA investments are protected from capital gains tax. This can be particularly useful when you have built up a number of years' worth of ISA investments.

Income tax

- you do not have to pay income tax on any gains you make on your ISA investments: with cash ISAs, therefore, you do not have to pay tax on any interest paid. With shares or funds there is actually no advantage to holding your investments within an ISA if you are a standard rate taxpayer (as you do not pay tax on dividends anyway). However, if you are a higher rate tax payer you do get an extra tax advantage - as ordinarily you would pay an additional tax on dividends. (NB: If you think you might become a higher rate taxpayer in the future, it could make sense to invest in an ISA now to save your income in the future, when you become liable for the extra tax.)

Another advantage of ISAs is they do not need to be recorded on your tax returns.

Am I eligible to take out an ISA?

You must be 18 years or older to take out a stock and shares ISA, however 16 and 17 year olds can take out a cash ISA.

How much can I invest in my ISA?

Up until 6 April 2010 the amount you can invest in your ISA depends on age:

Please note:

Anyone over 16 years old is eligible to invest in a Cash ISA, subject to the appropriate limits. Anyone over 18 years old is eligible to invest in a Cash and/or a Stocks and Shares ISA, subject to the appropriate limits.

People aged under 50:

Up until 6 April 2010 the ISA allowance for any eligible adult under 50 is £7,200. Except for a maximum investment threshold of £3,600 into a Cash ISA, the allowance is fully flexible. This means you can invest in either a Stocks and Shares ISA or a Cash ISA (or both). The following examples should clarify how much you can invest in both ISA components:

Example 1

If you want to be fully invested in the stockmarket, you can invest your full £7,200 allowance into a Stocks and Shares ISA.

Example 2

If you want to take full advantage of your Cash ISA limit, you can invest £3,600 into a Cash ISA and then choose to invest up to a further £3,600 into a Stocks and Shares ISA.

Example 3

The limits are flexible, subject to a maximum of £3,600 in the cash ISA and £7,200 overall. So, you can invest, say, £5,000 into a Stocks and Shares ISA and put up to a further £2,200 into a Cash ISA – or any combination in between.

People aged 50 and over:

As a result of the 2009 Budget, your overall annual allowance has been raised to £10,200 (from £7,200) with up to £5,100 available to be invested in a Cash ISA.

However, this change will only take place from 6 October 2009, meaning the £3,000 allowance increase can only be invested after that date.

Your ISA allowance remains fully flexible, meaning you can invest in either a Stocks and Shares ISA or a Cash ISA, or both (subject to the maximum cash investment threshold of £3,600 before 6 October 2009 and £5,100 from 6 October 2009!)

Annual allowances from 6 April 2010

On 6 April 2010 the £3,000 annual ISA allowance increase to £10,200 will be extended to all eligible investors (with a maximum cash investment threshold of £5,100)

Help me find the right ISA for me

Before you open an ISA account you need to know which type of investment you want to make. You can invest in shares and/or funds, or opt for a cash ISA.

You can also choose your investments (funds and/or shares) yourself, or opt for a ready-made selection of funds. To invest in your own selection of funds and/or shares you will need to choose a provider which offers a fully self-select ISA.

Find out more about the different types of ISAs below:

Funds ISA

With a Funds ISA you can invest up to £7,200 in funds (unit trusts and OIECs) within your ISA (or up to £10,200 if you are 50 or over – see How much can I invest? above for details).

Find out more

Self-Select ISA

With a Self-Select ISA (also known as a Shares ISA or a Stocks and Shares ISA) you can invest up to £7,200 in your own choice of shares and/or funds (or up to £10,200 if you are 50 or over – see How much can I invest? above for details)

Find out more

Cash ISA

You can invest up to £3,600 in a cash ISA (or up to £5,100 if you are 50 or over - see How much can I invest? above for details).

We select top providers to bring you a great selection of cash ISAs.

Cash ISAs can now be transferred into Stocks and Shares ISAs:

• All Cash ISAs can be transferred into Stocks and Shares ISAs. There is a separate transfer form within your ISA account should you wish to do so.
• If you wish to transfer Cash ISAs from previous years then you can choose to transfer some or all of the amount.
• If you wish to transfer your Cash ISA from the current tax year, you must transfer the entire amount.

Find out more

Ready-Made Selections

You can invest up to £7,200 in one or a number of our Ready-Made Selections (or up to £10,200 if you are 50 or over – see How much can I invest? above for details).

Find out more

Secure your allowance

If time is running out and you are not sure where you want to invest, you can secure your ISA allowance by depositing cash before the deadline. You can then choose where to invest at your leisure.

Secure your allowance

Where you decide to invest depends on your own investment criteria. What level of risk do you want? Are you interested in a particular sector? Is there an individual company or fund you would like to invest in? Would you like to know where other people are putting their money?

Sometimes the vast number of options available can be daunting. To help you narrow down your choices we have collected together two pages of useful tips, tables and tools. Remember, if time is running out, you can simply deposit cash before the deadline and choose your investments later, by securing your allowance.

Investment Ideas

We offer a range of tips, ideas and performance information to help you choose the right investment for you. Visit our Investment Ideas centre for the following:

• The latest tips brought to you by the experts
• Find out what other users have in their portfolios
• Model Portfolios run by The Analyst, Peter Temple
• Read the latest fund and sector watch articles
• Read the latest share dealing articles
• Find out about the top 10 funds and shares.

Find out more

Trading Tools

We offer a range of helpful tools to assist you in narrowing down your investment options for your ISA. Visit our Trading Tools centre for the following:

• Monitor all your investments with our free Portfolio tool
• Get a short-list of shares based on your own criteria
• Find funds for an ISA, pension or individual investments
• Keep up with the latest topics on our discussion boards.

Find out more

Ready-Made Selections

If you prefer to let us do the hard work for you, we have created seven Ready-Made ISA selections. Each selection includes four carefully picked funds and you can choose them according to your investment priorities.

Find out more