Guide to ISAs: What is an ISA and what is my ISA annual allowance. What is a Cash ISA and a Stocks and Shares ISA, which ISA is Best Out of These Two? How Do I Set Up an ISA, and can I Change ISA Providers Once I am Set Up

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What is an ISA & How Does it Work?
Individual Savings Accounts (ISAs) were originally introduced back in 1999 as a direct replacement for the old PEPs & TESSAs. Many people still get confused by ISAs and as a result don’t yet have one set up. Ultimately an ISA is a very simple financial product – it is an Individual Savings Account that allows you to save a pre-determined amount of cash each year completely tax free.

If you already have a savings account or any form of investments, then you should also have an ISA. Simply put, you normally pay tax on the interest you receive from all of your savings and investments, but if you also have an ISA too, the money saved within it up to the agreed amount is not taxable, meaning you pay less tax overall on your entire savings & investments as a percentage of that is held within the ISA that is not taxable.

There are two types of ISAs – a Cash ISA and a Stocks & Shares ISA. A Cash ISA is simply a savings account where you don’t pay any tax, and these therefore normally give you a better return than any savings account pound for pound. A Stock & Shares ISA allows shares to be placed within a unit trust or investment trust, which has its own tax benefits explained below.

What is a Stocks and Shares ISA, and what are the benefits?
This is where your shares allowance is placed in a type of collective investment vehicle, such as the unit or investment trust as mentioned above. These collective investments are pooled and taken care of by a fund manager who selects shares based on a variety of criteria such as industry type, geographic locations, and the value of the investment then depends on the pooled performance of the shares overall.

A stocks and Shares ISA has two tax benefits, the first being any profits generated from a positive share price performance are not subject to capital gains tax, and secondly all of the tax on the bonds can be reclaimed.

How much can I deposit into an ISA?
Currently the total limit is £10,680, of which £5,340 may be cash, or you can use the whole allowance for shares if you prefer.

How Do I Access Money Saved in an ISA?
It’s a common misconception to think that you cannot access the money in your ISA once it is deposited. You can, very easily too! And by doing so you are not losing any of the tax benefit on whatever you choose to leave within the ISA if you do not need to withdraw it all. There is one set back however to removing money from your ISA – it cannot be put back in again in that same financial year, so only remove money from your ISA if you really do need to!

Can I switch ISA providers once I am set up with an existing ISA account?
Absolutely, and it is highly recommend that you do to ensure you are always receiving the best ISA deals in the market. There are no downsides to shopping around and moving your ISA to another provider. There can be a few restrictions depending on whether you are moving your current year’s allowance or the previous year’s allowance, and if your ISA is a cash ISA or a Stocks and Share ISA, or a combination of both. For those restrictions it’s simply best to ask the provider you're considering moving over to and your existing provider, both of whom will be able to clarify things clearly for you.

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