ISAs Demystified

The Individual Savings Account (ISA) scheme was put in place by the UK government to encourage people to save and invest for their future with a generous tax break. Basically, any money saved or invested with the ISA scheme is exempt from capital gains tax, so if you earn any interest or returns from your account, you do not have to surrender any of this to the taxman. This makes it particularly suitable for those who are saving for long or medium term goals, such as the down payment on a mortgage or a second home abroad.

There are two main types of ISA, the Stocks and Shares ISA, and the Cash ISA. Cash ISAs a type of savings account, are virtually indistinguishable from their non-ISA equivalents, except for the higher interest rate and the cap on the amount you can save. You can save up to £5,100 in a Cash ISA over the course of a tax year, which runs from the first of April to the following thirty-first of March.

You can get lots of different types of Cash ISA, including notice ISAs, which mean that you have to give a certain period of notice before withdrawing money (usually 30, 60, or 90 days) and regular savings ISAs, which require you to deposit a certain amount each month. The pay-off for these restrictions comes in the form of a much higher interest rate, and if you are in a financially stable position and are saving for a long term goal, these accounts can make a lot of sense.

A Stocks and Shares ISA is much like a Cash ISA, but you have to invest your money in the stock market rather than a savings account. This investment can take any number of forms, from pooled investments such as unit trusts and OEICs to individual shares and bonds. You can invest up to £10,200 in a Stocks and Shares ISA over the course of the financial year, although if you have a cash ISA as well, then you cannot invest more than £10,200 per year between them. For great deals on ISA savings and investments, visit the Legal & General website.

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