A guide to ISAs

What is an ISA?

An ISA (individual savings account) is a scheme that offers individuals the ability to have tax-free savings, which can be held in cash, shares and unit trusts. The amount of money that individuals can invest into ISA accounts may vary depending on the current tax year.

These accounts are exempt from income tax and capital gains tax on the investment returns, and no tax is payable on money withdrawn from the scheme. Ultimately, ISAs allow individuals to create a portfolio that''s sheltered from the taxman.

There are two main types of ISA.

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Cash ISAs

This is effectively an account that pays interest tax-free, as opposed to savings accounts on which you would pay tax such as fixed rate bonds, notice savings accounts and easy access versions. It can include savings in bank and building society accounts, in addition to some national savings and investments products.

Pros

You can choose from a range of products designed to meet different needs, Instant Access, Regular Savings, or Fixed rate
They don''t end when the tax year does. So your money will continue earning you tax free interest as long as hold onto it

Cons

The potential return is much lower than that of a stocks and shares ISA
Some charge fees for withdrawing money from the account

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Stocks and shares ISAs

These allow you to invest into range of investments, such as government and corporate bonds, property and stocks and shares as part of your allowance. Because they are held in an ISA, any gains you make are tax efficient, helping you to save some tax depending on what investments you have and what levels of tax you pay.

Stocks and shares ISAs can include shares in companies, unit trusts and investment funds, corporate bonds and government bonds.

Pros

Higher potential returns than a cash ISA
Gains you make are protected from capital gains tax
Higher-rate tax payers will pay less income tax on any dividends they may get

Cons

These are higher-risk investments – shares purchased can lose value just as they can gain value
This type of investment should be considered as part of a long-term financial plan

Read more about the Stocks and Shares ISA

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What you need to know about ISAs

Within a stocks and shares ISA, you pay no capital gains tax and no further tax on any income
You don''t need to declare ISAs on your tax return
Any UK resident aged 18 or over (16 for cash ISAs) can invest. There is no upper age limit and you can withdraw your tax-efficient savings whenever you need
The amount you can invest each tax year is decided by the government; for the 2014–15 tax year, the allowance was £15,000
In many cases, it costs no more to hold cash and investments inside an ISA than to hold them outside, so investors can receive these benefits for free
Since the income is not taxable it does not count for age-related personal income tax allowance reduction (although this age-related element is being phased out)

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ISA alternatives

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EIS funds

An Enterprise Investment Scheme fund, or EIS fund for short, is a managed investment vehicle that raises cash from individuals and institutions for the purpose of investing in a portfolio of EIS-eligible ventures. EIS funds offer generous tax breaks including relief of 30% the amount invested off your tax bill. SyndicateRoom operates a passive EIS fund called Access EIS – you can learn more about it here.
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P2P loans

Peer-to-peer (P2P) loans offer those interested in taking on a little more risk the chance to select directly who to lend money to. Cutting out the bank and many other intermediaries, P2P websites can currently offer lenders anywhere from 10x to 15x the returns of a savings account. Find out more about peer-to-peer lending.
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Savings account

While putting your money into a savings account is normally seen as the safe choice, the limited interest earned on a savings account means you’re not likely to see much by way of real returns.
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