• ISAs

    Understand what an ISA is and how to make the most of your annual allowance.

  • ISA stands for Individual Savings Account. They're a Government idea to make it more beneficial for people to save, by offering tax free benefits on money invested up to an annual limit. There are two main types of ISA: cash ISAs and stocks and shares ISAs.

    Here are some commonly asked questions about ISAs:

    What's the difference between cash ISAs and stocks and shares ISAs?

    Cash ISAs are like a normal savings deposit account, but with a limit to how much you can pay into them each year. Stocks and shares ISAs are another way to invest up to your annual ISA limit, in a fund that's linked to the performance of the stock market. Here the value of your investment can go up or down, and you may get back less than you originally invested.

    How do ISAs save you tax?

    The interest on cash ISAs is tax free. This means that while you normally pay income tax of between 20% and 50%, depending on your Income Tax rate, on interest in other accounts you don't pay this on ISA interest. You don't pay any additional personal income tax or capital gains tax on any money you earn from a stocks and shares ISA.

    Who can have an ISA?

    You just need to be 16 or over to apply for a cash ISA, and 18 or over to apply for a stocks and shares ISA - and a UK resident for tax purposes in both cases. Crown employees living abroad (such as diplomats and members of the armed forces) can also apply.

    Do you need a lot of money to start an ISA?

    No. You can open many cash ISAs for as little as £1. Stocks and shares ISAs generally have higher minimum contributions.

    What is the ISA limit this year?

    There's a limit on how much you can pay in. The government sets this limit, known as your annual allowance, for each tax year, which runs from the 6 April to 5 April. This year from 1 July 2014, your allowance is £15,000.

    Do you have to lock your money away for a long time?

    Not at all. Many cash ISAs offer savers instant access to their money. Stocks and shares ISAs may be more appropriate if you are looking to invest for a period of 5 to 10 years.

    Is it difficult to transfer money between ISA providers?

    You can often transfer your ISA (either type) between different providers - you will need to ask your new ISA manager to arrange the transfer for you. You can also move money from a cash ISA into a stocks and shares ISA without affecting your yearly allowance. You can also transfer a stocks and shares ISA into a Cash ISA.

    When deciding between ISAs, ask yourself:

    • How much money do you have to save or invest monthly / yearly?
    • How long will it be before you need your money?
    • Are you happy to accept the risk associated with investing in the stock market in exchange for a potential higher return than cash?

    If you're considering a cash ISA, think about whether to have one with a fixed interest rate and a fixed term, or with a variable interest rate and easy access. Usually with variable ISA accounts, you can get access to your money without charge. With fixed rate ISAs, you'll know how much interest you'll receive on your money, but there may be charges if you need to get to your money before the end of the fixed term.

    When investing in a stocks and shares ISA, you could potentially earn a higher return, but there is no guarantee of this. There is a risk that you may lose money because your investment and any income from it can go down as well as up, and you may get back less than you originally invested. You should also be prepared to invest for the medium to long-term, at least 5 to 10 years. Be honest about the amount of risk you are prepared to take, and seek advice before investing.

    • Think about whether you've got money tucked away in current accounts or other savings accounts that you could put into an ISA to get ISA tax advantages.
    • Start your ISA saving early so that you aren't rushing to get everything sorted out as the tax year end looms each year, and so that you benefit from the tax advantages for longer.
    • If you have a cash ISA, make sure you understand the interest rate and how quickly you can withdraw your money if the need arises. Is the interest rate fixed or variable? If it's fixed, you can be sure of exactly how much interest you'll earn over the term your money is tied in for.
    • Always try to contribute the maximum yearly ISA allowance in every tax year so you can benefit from any tax advantages on the money you save or invest. If you don't have a lump sum, you can save monthly up to the ISA allowance. Any unused ISA allowance cannot be carried forward to the next tax year.
    • Be aware of the amount of risk you are prepared to take and how quickly you might need to access your money when selecting the type of investment you'll make within a stocks and shares ISA. As a general rule, the sooner you want your money back, the less risk you may wish to take. It's a good idea to seek advice before investing.
    • Remember if you withdraw any money, you cannot replace it in the same tax year if you have already used your full ISA allowance.
    • If you have a stocks and shares ISA, check on its performance at regular intervals - every three months is reasonable.
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