The basics of investing in an Isa

An individual savings account (Isa) is a tax-efficient wrapper for your savings and investments. There are two types of Isas. Cash Isas are usually provided by banks and building societies and are essentially a tax-free savings account. Stocks and shares Isas are provided by stockbrokers and fund managers, and are used to hold investments. Don’t be confused by the name – they can also be used to hold bonds and funds, as well as shares.

You can contribute up to £15,000 to an Isa in the tax year ending 5 April 2015, rising to £15,240 next year. You can only pay into one cash Isa and one stocks and shares Isa in each tax year, but you can split your contribution between them in whatever proportion you like. Unused allowances can’t be rolled over to the next tax year – it’s a case of “use it or lose it”.

Isas from previous tax years can be transferred to a new provider for a better interest rate, lower charges or a wider range of investments. This does not count towards your limit for the year. But it’s vital to arrange an official transfer rather than simply withdrawing the money. Once you take money out, that Isa allowance is lost – you can’t just pay it back in.

However, if you need to take money out of your Isa, you can do so at any time (subject to any restrictions from your provider). In the meantime, you pay no tax on any income or capital gains within the account. That means Isas offer a very useful combination of flexibility and tax breaks.

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