Open An Isa And Enjoy A Tax-free Money Saving Scheme

The government wants you to save money and they're doing something about it. Now it's much easier to understand how you can invest in tax-free ISAs - Individual Savings Accounts.

How Much Can Be Invested In an Individual Savings Account?

The rules and regulations of popular savings vehicles were overhauled at the beginning of April 2008. Under the current rules, any UK resident who's at least 18 years old can now invest up to a maximum of 7,200 GBP in each tax year (6 April until the following 5 April).

As an investor you had a choice of investing in one 'maxi' ISA or two 'mini' ISAs. If you invest in a maxi ISA both components must be provided by a single financial institution. You do not have this restriction with two mini ISAs. If you wish you can invest with two separate providers.

The government fixed the amounts that you can deposit in an ISA in any tax year. In the past it the structure was a bit confusing.

For the years through 2007/8 the limits were:

The mini ISA could have been invested in:

Cash: up to 3,000 GBP
Stocks and shares:up to 4,000 GBP

The maxi ISA had a total subscription limit of 7,000 GBP and could have been invested in:

Cash: up to 3,000 GBP
Stocks and shares:up to 7,000 GBP

Limits can be changed by the Chancellor of the Exchequer in the Budget. In the March 2007 Budget, the limits for the following tax year were increased. And the processed was simplified. The distinction between a maxi ISA and a mini ISA was abolished.

Today the total subscription limit is 7,200 GBP. It can be invested either in cash, up to 3,600 GBP or a combination of stocks and shares up to 7,200 GBP.

The beauty of the current ISA scheme is that any income derived from interest and dividends are considered capital gains and are tax-free.
However, if any cash is held in the stocks and shares component it is subject to a 20% flat charge.

What If You Have an Unused ISA Allowance?

You cannot carry forward any unused ISA allowance to future years. And if you deposit and subsequently withdraw money in the same tax year you cannot replace it.

Let's say that you paid in 3,000 GBP and then withdrew 2,100 GBP. You would only be able to deposit an additional 600 GBP prior to 6 April.

What Are the Charges for an ISA?

Built into the ISA is an annual re-registering fee which is usually deducted from your account.

Like a savings account, the ISA cash component is usually not subject to any charges. However some providers do charge fees when you transfer your ISA to a different provider.

If you choose to have collective funds in the Stocks and Shares component the initial fees and annual charges would be the same as if you held them outside your ISA.

Stocks and Shares that you select and purchase through a stockbroker will be subject to similar fees that are charged to accounts other than those within an ISA. In addition many stockbrokers charge an annual administration fee for your ISA.

Also, it is now easier to save because monthly investments are currently encouraged.