Understanding the Different ISAs Available

In a bid to encourage UK residents to save more money the British government introduced ISAs, short for individual savings accounts. The appeal of an ISA lies in the tax efficiency that you receive when saving your money in this type of account.

With many other types of saving account you are liable to pay tax on any interest accrued whereas an ISA gives you freedom from this, meaning no Income or Capital Gains tax is paid on the interest you receive or any return on your investment.

There are a number of different ISA products available, so a spot of initial research will ensure you choose the best product to suit your individual needs.

There are two types of ISA to choose from; Cash ISAs and Investment ISAs. A Cash ISA operates in a similar way to any other savings account that pays interest; you place money into your ISA account for a set period of time and then earn interest on your savings. The way in which a Cash ISA does differ to other bank accounts relates to the fact you will not pay any tax on the interest you receive, which ultimately means more money for you in the long run.

As with other types of savings account there are a number of different types of Cash ISA, from easy access to fixed rate to notice accounts. The rate of interest you receive tends to vary depending on which type of account you opt for, so it is well worth shopping around before making your final decision.

If you want to invest in a Cash ISA in the United Kingdom then you need to be 16 years of age or over. In addition, if you want to save money in a British bank account then you must be a resident in the UK.

An Investment ISA is a Stocks and Shares ISA which enables you to invest your money in a choice of funds with different investment objectives. Whether you want to achieve regular income or capital growth, an Investment ISA is also a tax-efficient way of saving that gives you the flexibility to tailor your investments to suit yourself.

You can open one Cash ISA and one Investment ISA each tax year. Under the 2008/09 tax rules that apply in the United Kingdom you can invest up to £3,600 in a Cash ISA. The remainder of your £7,200 allowance can be invested in a Stocks and Shares ISA. Alternatively, you can just open a single Stocks and Shares ISA and invest the full £7,200 in that.

As with opening any new savings account, it pays to take your time to thoroughly research the market. That way, you can be sure you are choosing the most suitable account for your needs.