Simple, flexible, tax-free: a beginner's guide to ISAs

What is an ISA?

What is an ISA?

An individual savings account (ISA) works in a similar way to a regular bank or building society savings account - except that any returns you make are tax-free.

ISAs were introduced by the Government in April 1999 to replace personal equity plans (Peps) and tax-exempt special savings accounts (Tessas). They are designed to be more flexible than Peps and Tessas in order to encourage a greater number of people to save for their future. They avoid the drawbacks of both Peps - which were seen as being skewed in favour of those with a relatively large amount of money to invest - and Tessas, which imposed penalties on investors accessing their money in less than five years.

Who can buy an ISA?

Anyone who is over 18 years old and resident in the UK. From April this year, 16- and 17-year-olds can get in on the act, too, although the amount they can invest is limited to £3,000 in a mini cash ISA.

How much cash do I need?

Everyone over the age of 18 gets an annual ISA allowance of £7,000 each tax year. So this year's allowance needs to be invested before the end of the tax year - 5 April.

Theoretically you can start an ISA with £1, but most providers require a minimum investment of £500. You can pay into your ISA at regular intervals, drip-feeding your payments to avoid the risk of investing one lump sum when the stock market is at its highest. However, some people invest a lump sum - even as much as their £7,000 allowance.

Is it true that there are two types of ISA?

Yes, there's the mini and the maxi ISA. You can invest in one or the other in any one tax year, but you can't have both. If you do take out a mini and a maxi in the same tax year, you could be liable for a fine from the Inland Revenue.

So what's the difference?

Mini ISAs come in three forms - cash, insurance or stocks and shares. You can invest up to £3,000 in a mini cash ISA, a further £3,000 in stocks and shares and £1,000 in a mini insurance ISA. You can hold one, two or all three of these types of mini ISA in one tax year. They do not all have to be purchased from the same investment house.

What's the advantage of a mini cash ISA?

These ISAs have proved the most popular with the general public because they are the simplest to understand. They are also low risk because no money is invested on the stock market. Instead they operate more like a bank or building society account, the difference being that the returns are tax-free. In addition, your funds are easily available - not locked away for five years, as was the case with a Tessa. Your cash is available for withdrawal whenever you wish, although remember that if you have already invested your full £7,000 in mini ISAs, it cannot be replaced in the same tax year.

Why choose a maxi ISA?

The big advantage of a maxi is that you can invest up to £7,000 in stocks and shares. The stock market offers greater potential for higher returns than investing with a bank or building society, although of course, there is also a chance of bigger losses.

You don't have to invest the full allowance in equities, however. You can also include cash and insurance if you prefer, up to a limit of £3,000 for cash and £1,000 for insurance, investing the remaining £3,000 in equities.

You are allowed only one maxi ISA in any one tax year, and if you choose to split your investment into cash, insurance and stocks and shares, these components must be invested with the same fund manager, making the maxi ISA less flexible than the mini.

Can I carry any part of my allowance over to next year?

No. Your allowance for this tax year will be lost for ever on 5 April. After that, you are limited to next year's allowance (also £7,000).

Which ISA should I choose?

Many equity ISAs are UK-based so your money is invested on the London Stock Exchange. As the UK market is likely to be familiar to you already, it's a good place to start.

In the longer term, a more balanced portfolio will require investments in European and international funds.

Themed funds, such as those focusing on technology or health care, have attracted interest among investors. Bear in mind, however, that these tend to be much riskier than general funds, owing to the narrower investment range.

OK, I'll start an ISA before the end of this financial year. How do I go about finding the one that best suits my needs?

You really are spoilt for choice. If you aren't sure what you need, it might be worth consulting an independent financial adviser. Alternatively, if you're feeling more confident, you could do your own research using the national press and the internet. All investment houses have their own websites giving further information.

When you've made your choice and want to buy an ISA, it may be worth going through a discount broker to save on the initial charge (see page 10).

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

Arts and Entertainment
Reimagined: Gwyneth Paltrow and Toni Collette in the film adaptation of Jane Austen's Emma
Arts and Entertainment
Jesuthasan Antonythasan as Dheepan
Cannes 2015Dheepan, film review
Richard Blair is concerned the trenches are falling into disrepair
newsGeorge Orwell's son wants to save war site that inspired book
Arts and Entertainment
The pair in their heyday in 1967
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

    Guru Careers: Software Developer / C# Developer

    £40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

    Neil Pavier: Management Accountant

    £45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

    Sheridan Maine: Commercial Accountant

    £45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

    Laura Norton: Project Accountant

    £50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

    Day In a Page

    Abuse - and the hell that came afterwards

    Abuse - and the hell that follows

    James Rhodes on the extraordinary legal battle to publish his memoir
    Why we need a 'tranquility map' of England, according to campaigners

    It's oh so quiet!

    The case for a 'tranquility map' of England
    'Timeless fashion': It may be a paradox, but the industry loves it

    'Timeless fashion'

    It may be a paradox, but the industry loves it
    If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

    Could have done with Osama bin Laden staying alive?

    Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
    New exhibition celebrates the evolution of swimwear

    Evolution of swimwear

    From bathing dresses in the twenties to modern bikinis
    Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

    Sun, sex and an anthropological study

    One academic’s summer of hell in Magaluf
    From Shakespeare to Rising Damp... to Vicious

    Frances de la Tour's 50-year triumph

    'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
    'That Whitsun, I was late getting away...'

    Ian McMillan on the Whitsun Weddings

    This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
    Kathryn Williams explores the works and influences of Sylvia Plath in a new light

    Songs from the bell jar

    Kathryn Williams explores the works and influences of Sylvia Plath
    How one man's day in high heels showed him that Cannes must change its 'no flats' policy

    One man's day in high heels

    ...showed him that Cannes must change its 'flats' policy
    Is a quiet crusade to reform executive pay bearing fruit?

    Is a quiet crusade to reform executive pay bearing fruit?

    Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
    The King David Hotel gives precious work to Palestinians - unless peace talks are on

    King David Hotel: Palestinians not included

    The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
    More people moving from Australia to New Zealand than in the other direction for first time in 24 years

    End of the Aussie brain drain

    More people moving from Australia to New Zealand than in the other direction for first time in 24 years
    Meditation is touted as a cure for mental instability but can it actually be bad for you?

    Can meditation be bad for you?

    Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
    Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

    Australia's first-ever Eurovision entrant

    Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine