The ISA Fact File: Getting the Most Out of Your Savings

Individual Savings Accounts (ISAs) provide a tax efficient way to save and can be a particularly attractive option for saving at a time when many accounts are offering relatively rates of interest for your money.

ISAs explained

An ISA is effectively a tax wrapper that shelters your money from certain taxes. there are two main types of ISA currently available: the cash ISA and the stocks and shares ISA.

A cash ISA acts like a regular savings account, where you are offered an interest rate and can choose between different levels of access in pursuit of different levels of return. the difference between a cash ISA and a regular savings account is that you don’t have to pay UK income tax on any interest earned.

A stocks and shares ISA provides a conduit for making tax efficient investments. you can often invest in a wide variety of options through a stocks and shares ISA and your money will remain protected from both UK income tax and capital gains tax too. as with investments made outside of Such an ISA it is important to remember that the value of your investment can go up as well as down and you may not get back all that you put in so you should consider carefully before you proceed.

Allowances and limits

Each tax year you can open one of each type of ISA per person, you must be at least 16 years of age to open a cash ISA and at least 18 years of age to open a stocks and shares ISA.

There is also an overall annual limit to the amount that you can place into an ISA or ISAs, known as your overall ISA allowance. for the 2011/2012 tax year the annual ISA allowance is set at 10,680, but will rise to 11,280 for the 2012/2013 tax year that starts in April this year.

Of your overall ISA allowance you can place up to half into a cash ISA and up to the balance in a stocks and shares ISA, or, alternatively you can invest up to the full amount in a stocks and shares ISA.

If you are thinking of opening up an ISA it’s a good idea to shop around and compare the market in order to get the best deal. While many savings rates are at rock bottom getting the most out of every penny that you have can be more important than ever, and putting your capital into a tax efficient ISA could be one way to do this.