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An Individual Savings Account (ISA) is a tax-efficient savings scheme designed by the Government to encourage people to save. With ISAs you can invest up to a maximum of £7,200* in any tax year. There are two main types of ISA you can hold:
• Cash ISA
• Stocks and shares ISA
Cash ISAs
With cash ISA saving, your money will accrue interest as it would in an ordinary bank or building society account but it's tax-free. Cash ISAs are useful if you want short-notice access to your money.
Stock and Shares ISAs
Stocks and shares ISAs, like all stock market investments, should be considered as long-term investments. A stocks and shares ISA will invest in the stock market so although any gains will not be taxed, the capital will also be exposed to the ups and downs associated with shares.
What you can invest
You can subscribe to both a cash ISA and a stocks and shares ISA, the amount subscribed must not exceed the overall subscription limit of £7,200* in a tax year, and only £3,600* of this can be invested in a cash ISA in a tax year.
For example, you could subscribe:
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£3,600 to a cash ISA and £3,600 to a stocks and shares ISA.
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£2,000 to a cash ISA and £5,200 to a stocks and shares ISA.
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Nothing to a cash ISA and £7,200 to a stocks and shares ISA.
*ISA limit changes: As from 6th October 2009, ISA limits will be increasing for those customers who will be 50 or over on 5th April 2010 (i.e. born on or before 5th April 1960). The ISA limits will increase from £3,600 to £5,100 in a cash ISA and from £7,200 to £10,200 in total to cash ISA and Stocks and Shares (investment) ISA.
From 6th April 2010 the new limits will apply to all customers.
For example, if you are eligible for the ISA allowance increase, you could subscribe:
- £5,100 to a cash ISA and £5,100 to a Stocks and Shares ISA.
- £4,000 to a cash ISA and £6,200 to a Stocks and Shares ISA.
- Nothing to a cash ISA and £10,200 to a Stocks and Shares ISA.
If you don't have a lump sum to invest, you can make regular payments into a stocks and shares or cash ISA.
Please bear in mind that the favourable tax treatment of ISA saving might not continue and that the value of tax relief depends upon your personal circumstances.
Read on to find out more about savings:
 Child Trust Fund guide
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