Hurry – if you want to avoid paying tax on your savings

ISAs offer savers lots of benefits, but there are rules attached, says James Daley

With only seven weeks left until the end of the tax year, time is running out to make use of your annual ISA (Individual Savings Account) allowance. Not sure what all the fuss is about? Read on.

What are ISAs?

ISAs were introduced by the Labour government nine years ago, replacing PEPs and Tessas. They allow every UK taxpayer to save a certain amount of money each year, without having to ever pay any tax on the interest, dividends or capital gains.

Because each tax year runs from April to April, February and March tend be the busiest time of year for ISA sales – as investors rush to take advantage of their annual allowances before the start of the new tax year.

You can invest your annual ISA allowance into either a cash savings account, or into stocks and shares. However, the limits vary, depending on which mix you decide to go for.

How much can I invest in a cash ISA?

If you only want to invest your ISA allowance into a cash savings account, you need to take out a "mini cash ISA". In the current tax year, you can put a maximum of £3,000 into these types of accounts, rising to £3,600 in the 2008/09 tax year.

The best no-notice account on the market at the moment is offered by Alliance & Leicester, paying interest of 6.25 per cent. To find other top deals, visit, or check out our Best Buy tables on page 19.

What if I want to invest in stocks and shares as well?

If you want to invest some of your savings in the stock market, you can put up to £7,000 a year into a maxi stocks and shares ISA, rising to £7,200 a year from 6 April. If you want to invest in a mix of cash and stocks & shares, you can use up to £3,000 (£3,600 from 6 April) of your maxi ISA allowance for cash investments.

Can I invest my ISA in anything apart from cash and shares?

Yes. Most unit trusts, investment trusts and Oeics (open-ended investment companies) qualify for inclusion within a stocks and shares ISA.

There are several thousand of these funds to choose from in the UK, investing in everything from bonds to commercial property to commodities. For more details on non-equity investments for your ISA, see our article on pages 8 & 9.

How much tax will I save by using an ISA?

In a regular cash savings account - or a current account - any interest accrued will be taxed at 20 per cent (or 40 per cent if you're a higher-rate taxpayer). Therefore, if your account advertises a gross interest rate of 5 per cent, you would only receive 4 per cent after tax, or just 3 per cent if you're a higher rate taxpayer. Within an ISA, however, you receive the full gross rate.

On a £3,000 ISA, that's only a saving of £30 or £60 a year. However, someone who has used their full cash ISA allowance each year would now be saving several hundred pounds in tax every tax year.

Anna Bowes, of AWD Chase de Vere, the independent financial advisers, says using your cash ISA allowance should be a no-brainer. "If you're a UK taxpayer and you use your cash ISA allowance, you're getting an immediate cash benefit by not paying tax on your savings," she says. "When it comes to stocks and shares ISAs, however, there may not be any immediate benefit unless you are a higher-rate taxpayer."

Every UK taxpayer has a capital gains tax allowance of £9,200 a year – so unless your invest-ments grow by more than this in a single tax year, you wouldn't be liable to pay tax, even if they're not held within an ISA.

However, if you're earning an income from your ISA investments – by investing in bond funds, for example – you will have to pay tax, unless you hold the funds within an ISA.

While basic-rate taxpayers do not have to pay tax on share dividends, higher-rate taxpayers are taxed at 22.5 per cent. Within an ISA, however, they can avoid this.

For those who take full advantage of their ISA allowance each year, the tax-breaks can eventually amount to thousands of pounds a year.

Can I switch money from a cash ISA into a stocks and shares ISA?

As of 6 April, you will be able to transfer savings from cash ISAs into stocks and shares ISAs. However, Bowes points out that you cannot make a transfer back the other way, so you need to be sure of your decision before you go ahead.

How do I open an ISA?

If you're looking to put all your money into a single savings account or fund, the provider will usually be able to hand over all the paperwork you need to ensure your money ends up within an ISA wrapper.

For those who want to invest in a number of different funds, or who want to invest directly in individual shares, it's necessary to use a broker, such as TD Waterhouse ( or The Share Centre (, or a fund supermarket, such as Fidelity's FundsNetwork (

If you need advice on where to put your money, you can find a financial adviser in your area, by visiting

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown


Actress isn't a fan of Ed Miliband

Arts and Entertainment
Rooney Mara plays a white Tiger Lily in forthcoming film Pan
filmFirst look at Rooney Mara in Pan
Life and Style

Do you qualify – and how do you get it?

Food blogger and Guardian writer Jack Monroe with her young son
Privately schooled, Oxford educated and a former editor of arguably the world's poshest magazine 'The Lady', it's perhaps unsurprising that Rachel Johnson rarely mixes with ordinary Proles.

The Mayor of London's sister, Rachel Johnson, apologises for shocking tweet about the PM

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Citifocus Ltd: Newly Qualified Accountants - Risk Mgmt

    £Attractive Package: Citifocus Ltd: Prestigious financial institution seeks to...

    Citifocus Ltd: Operational Risk Analyst

    £Negotiable: Citifocus Ltd: Experienced operational risk professional with ban...

    h2 Recruit Ltd: Business Development - Telecommunications - £50,000 OTE

    £25000 per annum + £50,000 OTE: h2 Recruit Ltd: London, Reading , Southend, Al...

    Recruitment Genius: Call Centre Agent - £22,000 OTE

    £18000 - £22000 per annum: Recruitment Genius: As a Call Centre Agent you will...

    Day In a Page

    Homeless Veterans Christmas Appeal: Drifting and forgotten - turning lives around for ex-soldiers

    Homeless Veterans Christmas Appeal: Turning lives around for ex-soldiers

    Our partner charities help veterans on the brink – and get them back on their feet
    Putin’s far-right ambition: Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU

    Putin’s far-right ambition

    Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU
    Tove Jansson's Moominland: What was the inspiration for Finland's most famous family?

    Escape to Moominland

    What was the inspiration for Finland's most famous family?
    Nightclubbing with Richard Young: The story behind his latest book of celebrity photographs

    24-Hour party person

    Photographer Richard Young has been snapping celebrities at play for 40 years. As his latest book is released, he reveals that it wasn’t all fun and games
    Michelle Obama's school dinners: America’s children have a message for the First Lady

    A taste for rebellion

    US children have started an online protest against Michelle Obama’s drive for healthy school meals by posting photos of their lunches
    Colouring books for adults: How the French are going crazy for Crayolas

    Colouring books for adults

    How the French are going crazy for Crayolas
    Jack Thorne's play 'Hope': What would you do as a local politician faced with an impossible choice of cuts?

    What would you do as a local politician faced with an impossible choice of cuts?

    Playwright Jack Thorne's latest work 'Hope' poses the question to audiences
    Ed Harcourt on Romeo Beckham and life as a court composer at Burberry

    Call me Ed Mozart

    Paloma Faith, Lana del Ray... Romeo Beckham. Ed Harcourt has proved that he can write for them all. But it took a personal crisis to turn him from indie star to writer-for-hire
    10 best stocking fillers for foodies

    Festive treats: 10 best stocking fillers for foodies

    From boozy milk to wasabi, give the food-lover in your life some extra-special, unusual treats to wake up to on Christmas morning
    Phil Hughes head injury: He had one weakness – it has come back to haunt him

    Phil Hughes had one weakness – it has come back to haunt him

    Prolific opener had world at his feet until Harmison and Flintoff bounced him
    'I have an age of attraction that starts as low as four': How do you deal with a paedophile who has never committed a crime?

    'I am a paedophile'

    Is our approach to sex offenders helping to create more victims?
    How bad do you have to be to lose a Home Office contract?

    How bad do you have to be to lose a Home Office contract?

    Serco given Yarl’s Wood immigration contract despite ‘vast failings’
    Green Party on the march in Bristol: From a lost deposit to victory

    From a lost deposit to victory

    Green Party on the march in Bristol
    Putting the grot right into Santa's grotto

    Winter blunderlands

    Putting the grot into grotto
    'It just came to us, why not do it naked?' London's first nude free runner captured in breathtaking images across capital

    'It just came to us, why not do it naked?'

    London's first nude free runner captured in breathtaking images across capital