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ISAs demystified

Individual Savings Accounts (ISAs) were brought in by the UK government in April 1999 to replace PEPs (Personal Equity Plans) and TESSAs(Tax Exempt Special Savings Accounts). However, unlike their predecessors, ISAs are not financial products in their own right. Rather, they are a tax exemption that can apply to a whole range of savings and investment schemes. Confused? Let this guide clear things up for you.

If you have any savings or investments at all, then it makes sense to have all or a portion of them contained within one or more ISAs. This is because the money you have invested in an ISA is not subject to capital gains tax, which means that you will earn greater returns from them. There are two types of ISA that you can have: Cash ISAs, and Stocks and Shares ISAs.

Cash ISAs are basically the same as any other type of savings account, except that you do not have to pay any tax on the interest. Basic rate taxpayers currently have to give about 20% of the income they receive in the form of interest payments to the taxman, and if you are on a higher rate of tax, this figure can be as high as 40%. However, if this cash were invested in an ISA, you would not have to pay any tax on the interest that you earn from it. It is rare for non-ISA savings accounts to pay a higher rate of interest once the tax is taken off. For example, in order to beat an ISA with a 6% annual rate, a non-ISA savings account would have to offer a rate of above 7.5%, or 10% if you were in a higher tax bracket. There are lots of different types of cash ISA available, including fixed rate, instant access, and accounts with an interest rate that is guaranteed to stay above the Bank of England base rate.

A Stocks and Shares ISA is different. You can place any type of stock market investment within an ISA, whether it is a portfolio of shares managed by a stockbroker, an investment in collective investment vehicles such as unit trusts, or any combination of the two.  There are two tax advantages involved with a stocks and shares ISA. Firstly, any profits made from rises in share prices arenít eligible for capital gains tax. Secondly, any tax on bonds contained within the ISA can be reclaimed from the taxman.

Does this all sound too good to be true? Well, there is a catch, in that there is a maximum amount that you can put into ISAs. From April 6th 2010, the limit will rise from £7,200 to £10,200, so you will be able to invest up to £5,100 in a cash ISA, and up to £5,100 in a stocks and shares ISA. Have a look at the Santander website to find some good deals on savings.


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