What is an ISA?

An ISA or Individual Savings Account isn’t an investment itself. It is a tax efficient “wrapper” in which you can place other investments. Placing investments in an ISA “wrapper” means that any growth from an investment held within an ISA will not be liable for capital gains tax and any interest gained from either cash or bond holdings within an ISA will not be liable for income tax.

Who can have an ISA?

In general you have to be 18 or over and resident in the UK for tax purposes to qualify for an ISA allowance.

If you are 16 or 17 you qualify for the cash portion of the ISA allowance.

What types of investments can I make in an ISA?

An individual can use their ISA allowance to invest in some or all of the following.

Cash ISA

A Cash ISA operates just like a normal Bank or Building Society savings account apart from the fact that the interest paid on your deposit is paid gross of tax rather than net of tax, giving you a higher return.

An investor can save £5,100 pounds in any tax year (a tax year runs from 6th April to 5th April the following year) into one of these accounts.

Once you have saved £5,100 pounds into a Cash ISA in a tax year you cannot add any more to it even if you wish to top the account up following a withdrawal.

However if you have a Cash ISA with one provider and wish to switch to another (e.g. for a better interest rate or a better bank) some accounts allow transfers of money into them. These transfers do not count against your ISA allowance.

What is a Stocks and Shares ISA?

You can use some or all of your annual ISA allowance to purchase individual shares or funds.

In its simplest form, a stocks and shares ISA, is just like any other share trading account. You set up an account with a stockbroker and give them your investment instructions, which they execute for a fee. (More on account fees in a later article in our ISA education series).

As well as buying individual shares, you can also include collective investments or funds in your stocks and shares ISA.

There are several reasons to look at buying funds as opposed to individual shares that will be examined in an article in a few weeks time.

In brief, funds can give you an exposure to a wider set of investments, such as corporate bonds, overseas equities, etc and they remove the tricky art of picking the right shares by giving you exposure to a range of shares suited to your investment requirements.

How much money can I put into an ISA?

If you like, you can open both a cash ISA and a stocks and shares ISA in the same tax year. However, the total amount you put in cannot exceed £10,200.

So you could invest £5,100 into each, or you could invest £2,000 in a cash ISA and £8,200 in a stocks and shares ISA. You can't however have £6,000 in a cash ISA and £4,200 in the stocks and shares version, as the cash limit is just £5,100 remember.

You can have both types of ISAs with the same provider, or you can have them with two separate companies. Most ISA providers will also let you combine cash ISAs from previous years into one big cash ISA. The same applies to stocks and shares ISAs.

The limits apply to all the money you put in during a tax year. So, for example, you can't put £10,200 into a stocks and shares ISA in May, withdraw £2,000 in August and then put it back again in October. In this instance, you used up all of your ISA limit with your initial contribution in May