An Introduction to ISAs

Whether you're saving up for, a summer holiday, a new car, or just for a rainy day, it's worth making sure your savings are earning you money. Recent figures reported by Aviva Family Finances shows that the average UK family is now saving £80 a month, the highest figure in at least two years, and the average amount saved is £1,277, up from £967 recorded in November 2011.

The report also showed that the number of people who didn't have savings has fallen to 34%, compared to November 2011's 39%. This means that more people in the UK are putting more of their money in savings.

In the future, Money Dashboard will recommend new accounts or financial products to our users only if our money management software calculates that they could be better off by switching. A suggestion might be switching your savings account to a tax-free ISA.

What's an ISA?

An ISA, or Individual Savings Account, is a type of bank account, also known as a “wrapper”, which gives tax advantages for any UK resident over 16. If you have money in a savings account that is not an ISA, then you could be paying more tax than you need to.

In April 1999 the Government replaced PEPs and TESSAs, with the ISA, designed to create a simpler way for UK citizens to start saving money without having to pay tax on the interest. The main type is a Cash ISA, but there are also stocks and shares ISAs for stock market traders.

According to the Aviva Family Finances report, only 35% of people have cash ISAs, compared to 79% who have bank or building society savings accounts.

What's the catch?

Every tax year (6 April – 5 April) you can put a certain amount of cash into your ISA and the interest earned will not be taxed. In 2012/2013 the maximum is £5,640 in cash. You can invest £11,280 in a stocks and shares ISA, or £5,640 in cash and £5,640 in shares, but you can't exceed £5,640 in cash.

In the new tax year you will gain tax free interest on all the cash in your ISA. The maximum only applies to how much you can pay in per year, there is no limit on the total. However you can still only pay in your allowance for that year, the allocation does not roll over into the next year and you can only pay into one cash ISA each year.

How do I sign up?

Most major banks and building societies offer cash ISAs, as does National Savings & Investments. Check the terms and conditions on different accounts to find the best deal. If you are looking to open a stocks and shares ISA, speak to a fund manager, your bank, or an independent financial advisor.

If your cash is in a taxed savings account, there's still time to open an ISA before April and you can watch your money grow despite the low interest rates of the current economy.

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