If someone comes up to you and says "Pssst! Wanna save some tax?" the chances are, it is a financial advisor trying to sell you an Individual Savings Account before the tax year ends on 5 April. ISAs come in two sorts – cash ISAs which are a good idea for everyone – and shares ISAs, which are not.
A cash ISA is just a bank or building society savings account with the ISA label. You can put as little as £10 a year into one and the interest earned is completely free of tax. You can take the money out at any time without losing the tax-free status. The only restriction is that you cannot put more than £3000 in a tax year into one. So if you get your skates on – and you’ve got the money! – you can put £3000 in by 5 April and another £3000 on April 6.
There is another sort of ISA which invests your money in shares on the stock market. If you have a cash ISA you can also put £3000 into one of these. If you do not, then you can put up to £7000 into one. Any dividends or gains are free of all UK tax. Stock market investments are for the long term and you should only consider a shares ISA if you are happy to leave your money in it for at least five years.
But whether you choose a cash or a shares ISA or both, there is that great feeling that you are at least keeping some of your income away from the Chancellor.
9 March 2002
e-mail Paul Lewis on paul@paullewis.co.uk