Learn About Investing

Learn About Investing

Learn about

ISA

This is an article about ISAs and how they relate to investing in general.

Click here for more information about the Orbis Access Stocks & Shares ISA.

Stocks and Shares ISA

Don't let the taxman nibble

Types of ISA

An Individual Savings Account (ISA) is a tax-efficient way to save or invest. There are two types available: Cash ISAs and Stocks & Shares ISAs.

In many ways a Cash ISA is no different from a regular cash savings account, it just happens that the interest you earn is not taxed.

With a Stocks & Shares ISA any money deposited into the account is invested in a mix of assets, such as shares and bonds. Any dividends or gains are tax-efficient.

ISAs are not investments in themselves. They are a tax-efficient account into which investments are placed. You could save cash, or own shares, either inside or outside an ISA account.

ISAs were introduced by the UK government in 1999 and quickly established themselves as a popular choice. By 2011 almost one in two UK adults had invested in an ISA and in that same year Junior ISAs were also introduced for children. In 2014, the government simplified the rules relating to ISAs, creating the New ISA (NISA).

>>Tax treatment depends on the individual circumstances of investors and can change in the future.

Reasons to invest in ISAs

If you have money to invest, it’s generally best to use up your ISA allowance first before investing outside an ISA.

If you’re not investing through an ISA, interest on cash and share dividends are subject to income tax. Moreover, if you sell shares at a profit, they may be subject to capital gains tax.

While the tax saving might seem small in a single year, over the long term the power of compounding kicks in and the tax savings mount up.

For this reason, you shouldn’t withdraw money from an ISA unless you really have to. Once the money’s outside the ISA zone, its special tax status is lost. The annual allowance can only be used once and is lost when you withdraw your money.

ISA limits

In each tax year (6 April to 5 April) you can open one Cash ISA and one Stocks & Shares ISA. You can invest up to £15,240 which can be split between the two account types as you wish. 

Switching ISA providers

Switching ISA provider is permitted any time, but be aware that some ISA providers allow you to transfer in previous ISAs (from earlier tax years) while others don’t. You can also transfer money from a Cash ISA into a Stocks & Shares ISA, or vice versa.

Investments built up from previous years remain sheltered from tax and do not count towards (or ‘use up’) your current year limit.  If you want to switch ISA providers, it must be directly from one provider to another in the form of an ISA transfer.

Transfer vs. withdraw

Imagine you had invested £20,000 in ISAs during previous tax years and withdrew that money to pay into another ISA account. You would only be able to pay in up to £15,240 (the current limit) to the new provider. What’s more, this would use up the whole of your current year limit.

However, if you made the transfer directly from one ISA provider to another, the £20,000 would remain as previous year ISAs and you could save up to an additional £15,240 in a new ISA.

So if you’re not going to spend it straight away, transfer your investment – don’t withdraw it!

Cash ISA tips

To get the best interest rates possible for your Cash ISA it makes sense to check who’s offering the best deals. This is easy to do online at sites like Which? and others.

Cash ISAs often carry temporary ‘bonus’ rates to attract new customers, switching the rate to something less competitive later. Better rates are available if you’re willing to tie your money up for a year or more – but obviously this is only appropriate if you’re confident that you won’t need the money sooner.

Related links

  • Transferring ISAs

    Investors can transfer their ISAs from one manager to another whenever they want.

    GOV.UK

  • Best Rate Cash ISAs

    Which? has scoured the cash ISA market to find the best tax-free accounts

    Which? Online

  • Full ISA Guide

    Many people think ISAs are complex, but it's simply a tax-free account into which you can place either cash or shares.

    MoneySavingExpert