ISA Masterclass #1: What's An ISA?

Published in Investing on 1 November 2010

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.

ISA allowances

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.

What's next?

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.

Next article:

#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.

-- Click here to find out more and to open an account today --

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The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

EdSwippet 01 Nov 2010 , 9:13am

If you plan on topping up your Motley Fool Self Select Stocks & Shares ISA during the current tax year, you'd better act fast -- there's only 5 months left to meet the deadline of 5 April 2011.

What a ridiculous statement.

Nik1961 01 Nov 2010 , 1:34pm

Is there such a thing as a cash ISA which offers rates at which the tax saved is more than the loss in interest from a non ISA account?

BarrenFluffit 01 Nov 2010 , 1:52pm

"you don't pay tax on the profits from it."

Or have to work out if tax is due. So no fiddly CGT calculations for rights issues or takeovers to find that there's nothing to pay. Any income doesn't count for tax credit purposes either.

There's an irony that stocks and shares ISA's are only good value for large sums but you can only build them up gradually so you have to keep at it.

taken2often 01 Nov 2010 , 2:27pm

People always forget that an ISA is only a wrapper so instead of investing only in ord shares you can buy Gilts,Pref shares Bonds and Pibs you can obtain much larger earnings. Based on once bought should not be sold until unless their time runs out. After many years I am now in the position to have a tax free income of more than 10k, even though I am showing a considerable capital loss which will either recover or reduce the IH tax when it becomes due. I am retired so I have no new mpney so my biggest problem with ISA's is that I am unable to fund my ISA by transfering shares to the value of the allowance.

This is another Rip Off The Government dept only speak to Providors never the savers. So their wishes rule unless the government are against it.

There is no logic only cost to selling and re purchasing.

notsuckseeded 01 Nov 2010 , 2:42pm

Who do you think you are kidding High Banks & Building Societies. They play on TV & Press advertising on Cash ISA's what seem to be a fantastic return. Yes to the banks!! what do they invest the moneys received, probably into a Maxi ISA.

With my portfolio I should get at best around 20%, this is done by switching if necessary, last year I got an average of 62%, if I get nothing this year this will average 31%!!

If you got £10200 go for Maxi ISA's for to a good IFA, choose a supplier with plenty of funds to offer. Banks & BS are very limited, and so is their advice

B1RT1E 01 Nov 2010 , 2:43pm

How can I 'wrap' my existing portfolio of shares in an ISA? Do I have to declare which shares are to be ISA'd?
Your idiot proof answers would be appreciated

steven686919 01 Nov 2010 , 3:05pm

The only way i know of wrapping shares held outside of an ISA is for these stocks to be sold and the proceeds to be subscribed in to the ISA where you can then repurchase them.

elephant888 01 Nov 2010 , 4:16pm

@B1RT1E the procedure you are describing is known as 'Bed and ISA'. See eg

taken2often 01 Nov 2010 , 5:26pm

Bed & ISA is the only way open to us but it is not in our best interest. Example I have some Pibs that pay gross. If I want to transfer them into my ISA then I lose a fair sum as the spread can be as much as 9 pence and the dealing cost is you have to pay the interest to date.

Coventry Build Soc 12.125% I would be forced to sell about 7000 at £1.40 =£9800 Buy back at £1.495 = 10,465

Loss £665.00 Commission 1.5% = £156.97

Total Loss £822 approx against say a £15.00 nominee transfer

Thats why the system is like this

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