New research from price comparison website confused.com has found that 14% of people do not understand the ISA rules.
An ISA (Individual Savings Account) is a tax efficient investment wrapper offering access to either cash savings or investments.
For the 2010/11 tax year, you can invest up to £10,200 into an ISA wrapper. Up to half of this (£5,100) can be saved into a cash ISA with the balance of the annual limit up to £10,200 available to invest in an investment ISA, commonly called a stocks and shares ISA.
For the 2011/12 tax year, starting on 6th April 2011, the annual ISA allowance is being increased to £10,680.
It will again be possible to save up to half of this annual allowance (£5,340) into a cash ISA with the balance of the unused allowance up to £10,680 available for investing in a stocks and shares ISA.
Different investment assets are taxed differently with an ISA wrapper.
There is no capital gains tax to pay on realised capital gains within an ISA wrapper.
For many investors who have an unused capital gains tax annual exemption (£10,100 of gains in the 2010/11 tax year, £10,600 in the 2011/12 tax year) this is not a particularly attractive feature, although not having to report gains within an ISA to HMRC is a big time-saver for some investors.
Interest on cash held within a cash ISA is free of income tax and paid gross. In this current low interest rate environment, this is an attractive feature for savers as most cash ISA accounts are essentially the same as cash savings accounts, but with interest paid gross rather than net.
Where cash is held temporarily within an investment ISA, any interest generated by this cash is subject to a flat-rate income tax charge of 20%, which is non-reclaimable.
Income from property or fixed interest securities investments within an investment ISA are also free of income tax.
The income tax treatment of UK dividend income within an investment ISA is broadly similar to how it is treated outside of an ISA, with the exception that higher rate tax payers have no additional income tax liability.
ISAs are becoming an increasingly important financial planning tool, enabling investors to shelter a growing amount of capital each year from income tax and capital gains tax. It is only the tax wrapper, so savings or investment decisions made within the environment of an ISA are equally as important.
