Successive governments, concerned at the relatively low level of savings in the UK economy have over the years introduced various means by which individuals can save through a tax-free environment.

Individual Savings Accounts (ISAs) were introduced in April 1999 to replace the earlier tax-efficient savings schemes known as PEPs and TESSAs. The government has confirmed that ISAs will become a permanent feature of the savings landscape.

What is an ISA?
ISAs are tax-exempt savings accounts available to individuals aged 18 or over who are resident and ordinarily resident in the UK. ISAs are only available to individual investors and cannot be held jointly.

ISAs are guaranteed to run for ten years although there is no minimum period for which the accounts must be held.

Since April 2001, 16 and 17 year olds have been able to open a mini cash ISA (see below). However if the funds to open such an account originated from the children’s parents then any income is not tax-free but taxable on the parents under the settlements provisions if it exceeds £100 per annum.

Investment limits
ISAs have an annual subscription limit of £7,200 of which not more than £3,600 can be invested in cash. There is no minimum subscription level.

In 2009/10 the ISA limits for people aged 50 and over will be raised to £10,200, of which £5,100 can be held in cash. This change will be made from 6 October 2009. The current ISA limits (£7,200 of which a maximum of £3,600 can be held in cash) will be increased for all investors to the same amount from 6 April 2010.

Investment choices
ISAs are allowed to invest in cash (including bank and building society accounts and designated National Savings), stocks and shares (including unit and investment trusts and government securities with at least five years to run) and life assurance.

Types of ISA
Investors are able to invest in two separate ISAs in each tax year; a cash ISA and a stocks and shares ISA.

Tax advantages
The income from ISA investments is exempt from income tax. However the tax credits on any dividends are not reclaimable.

Any capital gains made on investments held in an ISA are exempt from capital gains tax.

Uses of an ISA
Many people use an ISA in the first instance, to save for a rainy day. Since they were first introduced people have used them to save for retirement, to complement their pension plans or to save for future repayment of their mortgage to give just a few examples. We have known young people, wary of commitment to long-term saving start an ISA and when more certain of the future use it as a lump sum to start another financial plan.

How we can help
Please talk to us if you would like any further information on ISAs.

For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.