Getting your money into shape

Q: What is an ISA?
A: The acronym ISA stands for Individual Savings Account and from 6 April 1999 they replaced PEPs (Personal Equity Plans) and TESSAs (Tax Exempt Special Savings Accounts). ISAs are tax-efficient wrappers that provide income and capital gains free of tax. They don’t even have to be mentioned on your tax return.

Q: What types of ISA are available?
A: There are two types of ISA, a cash ISA and a stocks and shares ISA. Up to £7,000 (£7,200 from 6 April 2008) can be invested each year per person in an ISA, of which £3,000 (£3,600 from 6 April 2008) can be kept as a tax-free cash deposit. The proposal to reduce these limits has been withdrawn and they will now continue to at least 2010.

Q: Where can I save or invest in an ISA?
A: ISAs have two elements:

Cash
This allows you to save money in a simple savings account. A mini cash ISA is a flexible, tax-free savings account.

Stocks and shares
There are few restrictions in the types of shares you can invest in through an ISA. For instance, you could invest just as much in US shares as in the UK and the EU. You could invest through Investment Trust Shares, a Unit Trust or an OEIC Index Tracker. In addition, you can also invest in Gilt Index-Linked, Gilt Fixed Interest (provided these stocks have more than five years to run when bought for your ISA) or Loan and Debentures, either in a fund or an individual bond or stock (provided the bond or stock has more than five years to run when bought for your ISA).

Q: How much can I save and/or invest?
A: This depends on the type of ISA you select:

The most you can save and/or invest in this current tax year is £7,000. 

Maxi ISA - You can save up to £7,000 in a maxi ISA, including stocks and shares and cash.

Type of Maxi ISA
Savings limits (2007/08)
Stocks and shares only
up to £7,000

or a combination of the following:

Type of Maxi ISA 
Savings limits (2007/08)
Cash
up to £3,000
Stocks and shares
up to £4,000

Mini ISA - You can put money into just one type of mini ISA, or both, up to these limits:

Type of Mini ISA
Savings limits (2007/08)
Cash
up to £3,000
Stocks and shares
up to £4,000

Q. Do I have to pay tax on dividends?
A: This will depend on your tax position:

If you're a starting rate or basic rate taxpayer inside or outside an ISA, you pay tax at 10 per cent on dividend income. This is taken as a 'tax credit' before you receive the dividend and cannot be refunded for ISA investments

If you're a higher rate taxpayer, you would normally pay tax on dividend income at 32.5 per cent. In an ISA you won't get back the 10 per cent dividend tax credit element of this, but you will save by not having to pay any additional tax

Q: Who can open an ISA?
A: To pay into an ISA you must be:

A UK resident – with two exceptions: Crown employees, such as diplomats or members of the armed forces, who are working overseas but paid by the Government; and their husbands, wives or civil partners

Over 16 for the cash component
Over 18 for stocks and shares

An ISA must be in your name alone – you can't have a joint ISA.

Q: Why would I want an ISA?
A: Typically, cash ISAs could be a good choice if you are saving for a specific goal that is less than five years away. Stocks and shares ISAs may help you to boost your retirement savings in a tax-efficient manner, and could also be used later to generate a tax-free income to supplement a pension.

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