Individual Savings Accounts (ISA)

ISA Mortgages

Individual Savings Accounts (or ISAs as they are more commonly known) have become one of the most tax efficient ways to make regular, long-term savings...

Individual Savings Accounts

Get a Free Quote Introduction to Individual Savings Accounts

Individual Savings Accounts (or ISAs as they are more commonly known) have become one of the most tax efficient ways to make regular, long-term savings. Introduced in 1999 by the Labour government, they replaced PEPs and TESSAs.

What Exactly is an ISA
Commonly, investors believe that ISAs are investments in their own rights, such as shares or bonds. This is not actually the case; an ISA is simply a 'wrapper' that enables a company, often a bank or building society, to place other investment types such as shares or cash into the ISA in order to offer a tax free saving.

ISAs are offered in two key different types of instrument, namely cash and shares; most people will see references made to 'mini cash ISAs' as well as traditional 'share ISAs'.

The Basic Workings of an ISA
Quite simply, an ISA is a savings account where the interest accrued does not attract income tax. Therefore, if you are a higher rate tax payer who would normally pay tax on interest achieved at the 40 percent tax rate, placing your cash savings in an ISA will allow you to receive any income generated free of tax.

As an ISA is merely a type of account, there is a huge range of rates available depending on the specific account you select. An instant access ISA will generally produce a much lower rate of return than an ISA that is fixed and does not allow withdrawals for a long period of time.

Mini or Maxi
When investing in an ISA, you will have to decide whether you want to invest in a Mini ISA or a Maxi ISA. A good way of remembering the difference is that if you want to maximise your share holding as part of an ISA, then you will be looking for a Maxi ISA. If you wish only to maintain a cash-based investment, then you will be better off opting for a Mini ISA.

With a Maxi ISA, all products have to be purchased from one provider. Therefore, if you are purchasing both cash and shares, they will both have to come from the same company. In this case, the entire amount of your annual investment could be held in shares. With a Mini ISA, it is possible to purchase the cash and shares from two different sources.

Summary
Bullet Point An ISA is simply a wrapper or type of account that offers tax free returns on cash or share investments;
Bullet Point there are two types of ISAs available, Mini and Maxi;
Bullet Point if you want to invest mainly in shares, a Maxi ISA is likely to be more suitable;
Bullet Point if you prefer to make a simple cash investment, then a Mini ISA is likely to be a better bet.

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