Tax free savings
Saving is even more rewarding when you don't pay tax on the interest you earn. Most people can already earn some interest from their savings without paying tax.
With an ISA you don’t have to pay tax on the interest you earn over and above your normal tax-free savings allowance. So if you pay income tax, a cash ISA might be the best home for your first £20,000 of savings.
ISA stands for Individual Savings Account.
There are two types of ISA:
Cash ISA – essentially the same as a normal savings account except the interest is tax-free. There are many types of cash ISAs, such as easy access, notice, or fixed rate
Stocks & shares ISA – suitable if you can leave your money alone for at least five years. You can put your money into a range of investments. Bear in mind that the value of your investment can go down as well as up.
If you invest in a stocks and shares – or investment – ISA, your returns are protected from capital gains tax (a tax on your profit) and tax on dividends (a share of the profits from the company you invest in), as well as income tax.
Each tax year, which runs from 6 April to the following 5 April, there is a limit on how much money you can put into an ISA. This is called your ‘ISA allowance’. For the current tax year, your ‘ISA allowance’ is £20,000. You can choose how to divide your annual ISA allowance between cash and stocks & shares ISAs, however you choose.
You can transfer money that you have saved in previous tax years and from the current tax year into a new ISA without affecting its tax-free status. You can also switch your ISA from one provider to another, whenever you want.
To make a transfer, you must not close one ISA to open another, as this will affect your tax-free status. The transfer has to be arranged directly between the two ISA providers and you must ask your new ISA provider to organise this for you. Your current ISA provider cannot prevent you transferring, but they may charge you if you do switch.
You can also transfer from a stocks and shares ISA to a cash ISA. But you must transfer all of the money in your current tax year's ISA; you can’t leave some in the old account.
You can, if you wish, also transfer some, or all, of the money you put into this ISA in previous years without affecting your current ISA allowance.
You can put money in and take money out of an ISA whenever you wish (if the terms of your account allow), but try not to dip into your ISA savings unless absolutely necessary. This is because you can only put in an annual total of £20,000 into your ISA, whether you take any out or not, and could potentially lose the tax-free status on it.