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Money, tax and benefits

Money, tax and benefits

Saving and investing with ISAs

Individual Savings Accounts (ISAs) are tax-free savings accounts which means you do not have to declare any income from them. They were introduced in 1999 to replace PEPS and TESSAs. You can use an ISA to save cash, or invest in stocks and shares.

What can you save or invest in an ISA?

ISAs can be used to:

  • save cash in an ISA and the interest will be tax-free
  • invest in shares or funds in an ISA - any capital growth will be tax-free and there is no further tax to pay on any dividends you receive

Transferring money from cash ISAs to stocks and shares ISAs

If you have money saved from a previous tax year you are able to transfer some or all of the money from a cash ISA to a stocks and shares ISA without this affecting their annual ISA investment allowance.

Money saved in the current tax year:

  • savers are able to transfer money saved in the current tax year from a cash ISA to a stocks and shares ISA, but they must transfer the whole amount saved in that tax year in that cash ISA up to the day of the transfer
  • the money transferred is then treated as if it had been invested directly into the stocks and shares ISA in that tax year; the saver is then still able to save or invest the remainder of their £7,200 annual ISA investment limit in that tax year, including up to £3,600 in a cash ISA

How much tax will you save?

Interest from savings:

  • if you pay tax at the basic rate, outside an ISA you would usually pay 20 per cent tax (2008-2009) on your savings interest
  • if you pay tax at the higher rate, outside an ISA you would usually pay tax at 40 per cent on your savings interest
  • if you pay the 'saving rate' of tax for savings, outside an ISA you would pay tax at 10 per cent on your savings interest

Dividend income:

  • if you're a basic rate taxpayer inside or outside an ISA you pay tax at 10 per cent on dividend income; this is taken as a 'tax credit' before you receive the dividend and cannot be refunded for ISA investments
  • if you're a higher rate taxpayer you would normally pay tax on dividend income at 32.5 per cent; in an ISA you won't get back the 10 per cent dividend tax credit element of this, but you will save by not having to pay any additional tax

Capital Gains Tax (CGT) savings:

If you make gains of more than £9,600 from the sale of shares and certain other assets in the tax year 2008-2009 you would normally have to pay CGT. However, you do not have to pay any CGT on gains from an ISA. (But losses on ISA investments can't be used to reduce CGT on gains from investments outside the ISA.)

Can anyone pay into an ISA?

To pay into an ISA you must be:

  • a UK resident - with two exceptions: Crown employees, such as diplomats or members of the armed forces, who are working overseas but paid by the government; and their husbands, wives or civil partners
  • 16 or over for a cash ISA
  • 18 or over for a stocks and shares ISA

An ISA must be in your name alone; you can't have a joint ISA.

Further information

For further information you can call the HM Revenue & Customs helpline on 0845 604 1701 (open 8.30 am to 5.00 pm Monday to Thursday and 8.30 am to 4.30 pm on Friday).

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