See our recommended ISA accounts for the latest cash ISA rates or information on stocks and shares ISAs
Individual Savings Accounts, or ISAs as they're generally known, offer savers a way to earn interest on their money without incurring any tax.
There are two main types of ISA you can invest in; cash ISAs and shares based ISAs. Here's a run through of how each kind of account works;
A cash based ISA works in much the same way as your standard saving account, but with some important differences; firstly, the interest you earn is tax free, secondly there are limits on what you can pay in to the account each year;
Yearly Pay In Limits
As you might expect, HMRC can't afford to have individuals putting all of their earnings into tax free ISAs. Therefore, although there's no limit to the amount you're allowed to keep in an ISA, you can only pay in a set amount during each tax year. This limit changes year on year and is currently £5,640 for the 2012/2013 tax year.
Once you've paid in this amount you cannot not pay any more into the account until the next tax year. This rule applies even if you withdraw some of the funds. For example, if you paid in your full of allowance of £5,640 but then withdrew it all again, you'd have to wait until the 6th of next April (when the new tax year starts) before you could pay in again, even though the account would be empty.
Furthermore, though it is perfectly fine to have multiple cash ISAs, you can only pay into one of them in any given tax year. (You can, however, pay into a cash ISA and a shares based ISA in the same year, more on which later.)
Other than the limit on how much you can pay in, cash ISAs are felixible when it comes to depositing. You can add amounts to the account as and when it suits you. If you prefer to put in one lump sum at a certain point you can, but if you prefer to pay in a little in regular instalments, that's fine too.
With a cash ISA you can access your money as and when you need it, just as you could with an instant access savings account. The only exception would be if you were on a fixed rate ISA. Such accounts work in a similar way to fixed rate bonds, except that they are tax free and are subject to pay in limits.
Fixed Rate Cash ISAs
As mentioned above, these kind of ISAs are similar to high interest bonds. This means there is usually a 'term' for the account during which you cannot make withdrawals. In exchange for this reduced level of access you will usually find you get a better rate of interest and the benefit of the rate being fixed.
However, as well as being restricted in your access to your money, you normally have to be able to follow restrictions on depositing to. Normally, there'll be a minimum investment that you need to meet (frequently this will be the full pay in limit for that year) and this will have to be paid into the account all at one time, usually the start of the tax year. Therefore, this is a good option if you have a lump sum to invest which you are certain you won't be needing anytime soon. If not, it's not really viable .
Shares Based ISAs
As well as cash, you can also protect investments in stocks and shares from tax by placing them in an ISA.
Normally, shares based ISAs work through collective investments such as investment trusts where a fund manager picks select stocks and shares in which to invest the pooled resources at their disposal. However, there are also 'self-select' ISAs where you can invest in shares of individual companies purchased through a stockbroker.
One obvious difference between cash ISAs and shares based ISAs is that, whilst with the former your return is determined by the rate of interest and therefore guaranteed, with the later it depends on entirely on how the shares in question perform. It therefore comes with an element of risk.
As well as this fundamental difference, shares based ISAs also have a much higher pay in limit. You can pay as much as £11,280 into a shares based ISA each tax year.
If you wish, you are able to have both cash and shares based ISAs and you can pay into one of each type in the same tax year. However, if you do this, the cap of £11,280 applies to the combined amount you pay into both ISAs.
Put simply this means that over the course of the tax year;
- You can't pay more than £5,640 into your cash ISA.
- You can't pay more than £11,280 into your shares based ISA.
- The total amount you pay into the two ISAs combined can't exceed £11,280.
If you have an ISA already it still pays to shop around as there may be better rates out there. Given the rules about paying in and withdrawing into ISAs, if you want to switch it's important that you don't simply take the money from your account and move it to another one, as you'll lose the tax benefit. Rather, if you find a provider you want to switch to, contact them and they can arrange to have the funds moved for you.
There are rules governing how you are able to move the funds in ISAs about. When it comes to cash ISAs the following applies;
- You can move all the funds into another cash or shares based ISA.
- With the exception of money paid in using the current tax year's allowance you can split the funds between multiple providers and ISA types.
With shares based ISAs the following applies;
- You can move all the funds into another shares based ISA.
- You can't move the funds into a cash based ISA.
- With the exception of money paid in using the current tax year's allowance, you can split the funds between different shares based ISA providers.
When comparing ISAs the first decision to make is which sort of ISA you want to make use of. Here's a review of the options;
- Instant Access Cash ISA: Suited to those who want flexibility in terms of how they pay into and withdraw money from their account.
- Fixed Rate Cash ISA: Suited to those who have a lump sum to invest straightaway and can afford to leave the funds alone.
- Shares Based ISA: Suited to those willing to take the risk of losing money for a potentially higher return and those looking to invest more than £5,640 in an ISA.
Even if you have this clear in your mind, finding the right ISA for you can be tough. Fortunately, our comparison tool lets you see details of some of the best deals out there and compare them with ease.
Using UK Net Guide's ISA Comparison Table
Here's a guide to understanding the information in the above comparison table;
- Provider: In this column you'll see the name of the organisation offering the account. Usually these are familiar names such as high street banks, but sometimes we feature less well known companies from the world of finance.
- Account: In this column you'll see the name of that ISA account. This name will normally indicate the type of ISA in question i.e. 'cash' or 'instant access'. As cash ISAs are of more use to a higher number of people than fixed rate or share based ISAs, they tend to feature more frequently.
- Interest (AER): This is the interest rate on offer. (AER stands for annual equivalent rate. Giving you the rate in this way allows you to easily compare accounts whether they earn their interest daily, weekly, monthly or yearly.) Bear in mind that, as shares based ISAs don't actually have an interest rate, they'll be marked down simply as 'variable'.
- Notice Period: This column tells you if there are restrictions on accessing your money. This only really applies to fixed rate ISAs. Bear in mind that 'none' and 'instant' mean the same thing.
- Minimum Deposit: In this column you can see exactly how much you are required to deposit.
- More Info: If you are interested in an account, simply click the 'more info' button to see the full details.