Tax Free Savings

Individual Savings Accounts, (ISA's), took over from PEP's and TESSA's on 6th April 1999.

ISA's can invest in two different areas, cash (low risk) and stocks and shares, (higher risk). The maximum you can pay into ISA's is £7,000 each tax year of which no more than £3,000 can go into a cash ISA with the remaining £4,000 going into a stocks and shares ISA or alternatively you could choose to pay the whole £7,000 into a stocks and shares ISA.

Cash ISA's are simply Bank or Building Society accounts, which have the following advantages:-

1. You will receive all your interest, without anything being taken by the tax man. In normal Bank and Building Society accounts, if you are a basic rate tax payer the tax man will take 20% of your interest before you receive it and if you are a high rate tax payer the tax man will ask for another 20%.
2. Unlike TESSA's, cash ISA's do not have to be kept for a certain period of time and offer instant access, however you are only able to pay in £3,000 in any one tax year and cannot be replaced if you take the money out.
3. They offer extremely competitive rates of interest, with many offering almost 5% per annum.

You can see from the above that cash ISA's have no disadvantages.

Stocks and shares ISA's however are not quite as straight forward, as really they need to be kept for at least five years, to enable them to achieve reasonable growth. This type of investment generally goes up and down in line with the stock market, so there is no guarantee that you will get out more than you paid in.

The main advantage of stocks and shares ISA's is that you will pay no Capital Gains Tax on any growth you achieve, whereas many other investments maybe subject to Capital Gains Tax.

In summary, most people should consider cash ISA's but stocks and shares ISA's are for the more experienced investor.