What are ISAs, and how much can you put into them?
Each day this week we're taking a closer look at the Fool's favourite tax-free savings scheme. Join us for our ISA masterclass.
What actually is an Individual Savings Account, or ISA? With the way they're advertised, you could be forgiven for thinking an ISA is an investment product in itself -- like a fund of some sort.
But an ISA is just a tax-free wrapper that can be used to protect a number of different types of investment. Once an eligible investment is ISA-wrapped, you don't pay tax on the profits from it.
We'll look at the types of investment allowed in the next article on Tuesday, but as an example, the ISA we see advertised the most is a Cash ISA -- and the banks advertising them do try to make them sound fancy and sophisticated, don't you think?
"What's the difference between a Cash ISA and a savings account?" you may ask. Nothing much, because a Cash ISA actually is a savings account, just one on which interest is paid gross, with no tax taken out.
Of course, no government is going to let us have too much of a good thing, and the amount we can put into an ISA each year is limited.
This financial year, ending 5th April 2011, the total ISA limit is £10,200 per person, but of that, a maximum of £5,100 can be invested in a Cash ISA. That's a pretty sizeable sum to most people, especially when we consider that a couple can invest £20,400 a year between them, tax-free.
Once invested, as long as you keep the money in, you'll pay no tax on this year's investment in any future years. And come April 2011, you'll be able to inject next year's allowance into it and build it up further.
It won't matter how much this year's ISA will have grown by, and even if you choose a really good investment and it doubles or more, you'll still be able to top it up with next year's full allowance.
And there's additional good news in that the ISA limits are now tied to Retail Price Inflation, so next year's allowance is likely to be around £10,680 per person.
You can take money out of your ISA any time you please, so it's not locked up for any length of time -- but what you can't do is put it back in again. So if you've used up your £10,200 allowance this year, you can't, say, take £1,000 out for a holiday and then put it back later.
If you have any questions on what we've covered today, just ask in the Comments section below and we'll do what we can to help. In the next article, we'll examine what you can put into an ISA.
#2: What can you put in an ISA?
It's time to top up your ISA...
If you plan on topping up your Motley Fool Self Select Stocks & Shares ISA during the current tax year, don't leave it to the last minute. There's 5 months left to meet the deadline of 5 April 2011. Remember, you can invest up to £10,200 in any of our ISA eligible investments, with any profits made free from Capital Gains Tax.
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