Individual Savings Accounts (ISAs)

Although most savings accounts will pay interest on the balance of your savings, this is subject to Income and Capital Gains Tax. There are however various tax-free accounts available for investors wishing to avoid extra charges. These accounts offer greater investment returns on savings but there is a limit to how much money can be deposited. The two most popular tax-free saving options available are Individual Savings Accounts (ISAs) and Child Trust Funds (see Child Trust Fund).

ISAs offer everybody over the age of 18 an annual tax-free allowance for investment. There are two different types of ISA in which savers can choose to invest their money: a Cash ISA and a Stocks and Shares ISA. Cash ISAs are available for applicants over sixteen years of age, with a reduced allowance offered to younger savers. An individual is allowed have one of each type of ISA but cannot have multiple ISAs of the same type.

A Cash ISA will usually allow instant access to funds. Interest is paid gross, meaning that interest is paid without any tax deducted, either monthly or annually depending on the banking institution. Tiered interest rates may apply to these types of account (for an explanation of Tiered Interest rates, see Interest Rates).

As of 6th April 2008, you can invest up to £7,200 tax-free in an ISA. Up to £3,600 of this can be invested in a Cash ISA, with the remainder going into shares or stock-market investments. Although a stocks and shares ISA is a riskier option, in that the volatility of the stock-market may cause investments to reduce in value, the potential returns are much higher than a regular interest rate would provide.