You save without paying UK tax on the interest you earn, providing all ISA conditions are met - that's the simple appeal of ISA accounts.
Yet despite the credit-fuelled era of spend, spend, spend coming to a close, it's surprising how many people are still unaware of this tax-efficient approach to nurturing a nest egg.
The basics are this: if you put your money into a normal savings account run by a bank or a building society, you will pay tax on the interest you earn (unless you are a non-taxpayer).The advantage of an ISA account is that the taxman will no longer be able to get his hands on 20% (or 40% if you're a higher rate taxpayer) of your interest, nor will you be liable for any capital gains tax.
Although a few years back there were many different ISA products on offer, these days things are more straightforward. Broadly speaking there are two types of ISA accounts: a cash ISA and a stocks and shares ISA.
Cash ISAs
These are tax-efficient, give you easy access to your money and offer features like internet banking, although this may be dependent on your having a current account with your cash ISA provider. A cash ISA may not get you the highest interest return, but it is the safest approach.
Stocks and shares ISAs
Stocks and share ISAs are a way of investing in the stock market, with additional tax advantages. They can include stock market products like unit trusts, or company or government bonds.
Although they may offer much greater returns than a cash ISA, investors also take a greater risk: you can lose your capital if the value of the stock falls. However, there are ways of spreading these risks, and some firms offer products which actually protect your capital.
How much can I invest?
At the moment, the overall limit on ISA savings is £7,200. Of this, up to £3,600 can be saved in a cash ISA, which you can mix with a stocks and shares ISA up to £7,200 in total. If you use your ISA allowance solely in stocks and shares, the limit is £7,200.
From April 6 this year, the overall limit rises to £10,200 and the cash limit increases to £5,100. The ISA rules also allow for savings previously held in cash ISAs to be converted to stocks and shares ISAs. If you are 50 or over before 5 April 2010, the new limits came in during October last year and they already apply to you.
How easy will it be to get at my money?
Like bank accounts, ISAs are also divided according to how quickly you can get access to your money. As a rule, the easier it is to take your money out, the less interest you earn. In the same way, the longer you lock it away, the greater the return. In the case of stocks and shares ISAs based on company or government bonds, it will be assumed that you are committing for the fixed period of the bond.
So whether you're looking for somewhere to stash the cash for a short period or are more interested in a long-term investment, there's an ISA product out there for you. And with such obvious advantages, can you afford not to have one?
The information given in this article was correct as at 14/03/2011. It does not, however, take account of any changes in regulations, the law or interest rates since that time.
This article is not a substitute for obtaining professional advice from a qualified person or firm.
Examples given of products and services are not exclusive. Other companies may provide the same products and services, and inclusion of a product or service should not be taken to indicate that Barclays recommends it over any similar product or service.
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