The ISA (Individual Savings Account) was introduced back in 1999 to replace the old style of tax free savings accounts. Often when people hear the word ISA they are put off because they believe them to be incredibly complicated, but in reality they are simply a tax-free savings account in which you can place either cash or shares.
The difference between, and quite simply the reason why you need an ISA in comparison to a standard savings account is the amount of tax that you pay, or don’t as the case may be. With a standard savings account the basic rate tax payer will pay 20% on any interest received, the higher-rate tax payer will pay 40%, and the additional rate tax payer will pay 45%, with an ISA, regardless of the tax banding that you fall into, you will pay 0%; the difference is that simple.
There are two main types of ISA, the cash ISA, and the Stocks and Shares ISA.
The Cash ISA
Cash ISA is simply a form of savings accounts that you pay cash into and benefit from tax free interest. There are many different types of cash ISAs available, however you will be best speaking to a financial advisor to discuss the option that best suits your personal circumstances.
The Stocks and Shares ISA
Shares in public limited companies can be put into ISAs and are generally managed by stockbrokers. There are 3 main benefits to a share ISA:
- Any profits made on the shares are not subject to Capital Gains Tax
- It enables all tax on bonds to be reclaimed, and
- Dividend income will be taxed at only 10%