Put simply, an ISA is a tax free account into which you can place cash or shares.
ISAs were introduced in 1999 to replace older style tax free savings (PEPs and TESSAs) and should be the first place that a saver or investor should put their money.
The ISA itself is just a wrap that you put around the savings or investments. Martin Lewis of Moneysavingexpert has a good analogy for this:
Imagine a couple of cakes, one chocolate (cash) and one strawberry (shares). Usually the tax man comes along, picks up a slice and takes a bite of it.
Each year, to encourage saving, you’re given a tax free wrapper like cling film which you can put around some cake as you choose. Once inside the cling film, the nature of the cake hasn’t changed; the chocolate is still chocolate (cash is still cash) and the strawberry is still strawberry (shares are still shares), but because it’s wrapped up in cling film the tax man can no longer take a bite.
How much can you put in an ISA?
There are three options available to you each year…
- Put the maximum cash allowance in
You are able to put £5,760 (13/14 tax year) into a cash ISA. You can put up to a further £5,760 into a stocks and shares ISA if you wanted to, but you are not obliged to
- Put the maximum share allowance in
You can invest £11,520 (13/14) into a Stocks & Shares ISA but you will not be able to use a cash ISA in that tax year.
- Mix & Match
You can choose to save any amount (under £5,760 in cash) and use the remaining allowance in a shares ISA. For example, if you saved £1,000 in a cash ISA, you could save a further £10,520 in a shares ISA.
Each April you get a new allowance to use as you wish. This allows for quite substantial savings and investments to be built up over a number of years.