Are you unsure what an ISA is? If your answer is yes, then this handy guide will help you get to grips with the meaning of these three letters. After all, with so many ISAs out there, it’s not surprising that some people can get into a tangle. Especially when there are two types: cash ISAs and stocks and shares ISAs.This guide will take a closer look at these areas:
- Cash ISAs and stocks and shares ISAs
- What are their limitations?
- The difference between variable and fixed.
ISAs – a great way to save tax efficiently
The term ISA stands for ‘Individual Savings Account’. Cash ISAs were designed to encourage us all to save with the extra incentive of being tax free. Normally, the taxman takes 20% of any money made on savings – and more if you’re a higher rate taxpayer.
With a stocks and shares ISA, you won't have any personal tax to pay on any gains you might make. However, because the money is invested in the stock market, the value of your investment can go down as well as up and you may get back less than you invested.
In short, ISAs are a tax efficient way to save. And, when the time comes, they could prove an invaluable supplement to your pension. Of course, tax treatment depends on your individual circumstances and may change.
Your ISA limits
There are two types of ISA and a set of rules that go with them both:
- Cash ISA
- Stocks and shares ISA.
Each year, the government sets an upper limit on how much anyone can put into an ISA that year. For this tax year 2012/13 you can save up to £11,280. Remember, this is the total amount you can save in an ISA and you’re allowed to spread that across one cash ISA and one stocks and shares ISA. But don’t forget, there is a limit to how much you can put in a cash ISA – that limit is currently £5,640. Or you could put it all into a stocks and shares ISA.
However, you can’t put money into more than one cash ISA or more than one stocks and shares ISA in the same tax year. So, for example, these were the options set by the government for tax year 2012-13:
- The stocks and shares ISA limit for this tax year is £11,280. You can invest up to the full limit in a stocks and shares ISA with one provider, or
- Save up to £5,640 in a cash ISA and any remainder of the £11,280 ISA allowance in a stocks and shares ISA with either the same, or another provider.
Fixed or variable?
Like your mortgage, cash ISAs are available with either a variable or a fixed interest rate. The most flexible ISAs will be variable, with the rate subject to change. If you’re happy to set your money aside for a longer, fixed term, you’ll probably be rewarded with a slightly higher fixed interest rate.
Getting the right ISA for you
There are heaps of ISAs out there, so it’s good to know what’s what. At Halifax, each ISA helps you to save in the way that’s best for you – whether that’s an accessible source of cash for those last-minute emergencies, or a savings account that steadily builds up solid funds over the years.
What’s more, Halifax even offers what it calls an ‘ISA Promise’. This means that it will pay you interest while your existing cash ISA funds are being transferred, providing they are free to move.
Now that you understand a bit more about the ins and outs of ISAs, it’s worth shopping around for cash ISA deals– if you feel that’s the best way for you to save.