Money Advice

An ISA is a tax privileged way of saving or investing your money in the UK. The ISA was introduced in 1999 to replace the previous methods of saving and investing which were PEPs (Personal Equity Plans) or TESSAs (Tax-Exempt Special Savings Accounts). These earlier products were often criticized as being targeted and beneficial only to the middle classes, whereas the ISA was introduced with the idea that it would appeal to all people.

History of the ISA

Before March 2007 there were two varieties of ISA. There were Mini ISAs and Maxi ISAs. However, during the budget of March 2007 these were eradicated as the limits for the 2008/2009 tax year were increased.

Preceding this, there were also TESSA-only ISAs or TOISAs. These were introduced to enable any original capital (not including any interest) invested in a TESSA to be reinvested tax-free.

Components of an ISA

ISAs can include two components:

1. Firstly, a cash component. Like regular savings accounts this is a cash deposit except with an ISA it is tax free. Incidentally, a TOISA must consist completely of a cash deposit.

2. Secondly, a stocks and shares component. Here the money can be invested in any amalgamation of “qualifying investments”. Such as stock market equity investments, cash awaiting investment, or public debt securities. Therefore, the risk of the ISA can vary from low to high depending on the types of investments included in the ISA.

3. Lastly, the insurance component. This was only applicable up to the 2005/2006 tax year when maxi and mini ISAs were still available.

Can I transfer my ISA?

This can be done but not between differing types of ISAs. It can also only be done between managers. The saver cannot transfer the money as this will then be deemed as a withdrawal and therefore the saver will no longer be able to put it in an ISA if their subscription period is up.

Subscription limits

Limitations are applied to ISAs in each tax year and these can influence both the variety of ISA of which you subscribe to and the amount of money that you can invest.

As long as you are 18+ and a resident of the United Kingdom you are entitled to invest into one “maxi” ISA or two “mini” ISAs, (one for each component, please see above). These Mini ISAs can be with different providers if you so choose.

If you are aged between 16-18 and a resident of the United Kingdom you are entitled to open a cash “mini” ISA or a “maxi” ISA if you invest into the cash component.

Limits have been set by the government (up to and including 2007/2008), as to the amount that can be deposited into an ISA. These are set out below:

Mini ISA:
Cash up to three thousand pounds.
Stocks and shares up to four thousand pounds.

Maxi ISA:
Stocks and shares up to seven thousand pounds.

As previously mentioned the March 2007 Budget increased the limits for the 2008/2009 tax year and the difference between a maxi and mini ISA abolished. Therefore:

ISAs now have a subscription limit of seven thousand two hundred pounds which may be invested as follows:
Cash up to three thousand six hundred pounds.
Stocks and shares up to seven thousand two hundred pounds.

The Chancellor of the Exchequer can once again change these limits in the Budget.

Tax Treatment

Income and capital gains are all tax-free. A charge of 20% is applied to interest on any cash invested in a stocks and shares component.

ACT (advance corporation tax) used to be charged to companies when they paid dividends, however, this ended on 6th April, 1999.When this was applicable, the receiver of a dividend was entitled to a tax credit which reflected the ACT payable by companies. This tax credit was in order to lower the amount of tax paid by the receiver of a dividend.

However since April 1999, companies are no longer subject to paying ACT. To begin with dividends were accompanied with a “notional” 10% tax credit however this was gradually phased out between 6th April 1999 and 5th April 2004 thus reducing the tax-free status. Therefore, the savings account used for income rather than capital growth is far less tax efficient when placed in an equity fund, whereas a savings account based on other assets (bonds etc.) remains tax-free in relation to both income and capital growth.

CAT standards

This stands for Charges, Access and Terms. CAT standards were introduced by the Government in 1999 to make ISAs easier to understand and result in lower costs, therefore appealing to more investors. Plenty of products comply with the Cat standard however this does not guarantee the investor that they are being advised on the best type of investment for them.

Charges

ISA cash component: The only charge that applies to this type is when transferring to another provider otherwise it is free of charges.

Collective funds in Stocks and Shares: Initial and yearly charges are often applied as though outside an ISA.

Self Select Stocks and Shares ISAs: As these are provided by stockbrokers a brokerage fee again comparable to those outside an ISA, often applies. On top of this, the stockbroker may also apply their own fee by way of administrational costs.

Fund Supermarkets

These are ISA providing organizations which give admittance to a large variety of collective investments provided by a range of fund managers. They enable investors to create one diverse ISA so that they can transfer their investments between funds without having to alter their provider.

They are becoming increasingly popular as they provide the investor with a variety of options. They are paid by the fund managers and therefore there is also no charge to the investor.