ISA tax benefits

Cash ISAs compared with Stock & Share ISAs

Under Cash ISAs you can invest in high interest accounts usually with a Bank, Building Society or National Savings. Under Stock & Share ISAs you can invest in stock market holdings such as shares in companies, investment trust shares, Fixed Interest Securities and Gilts, usually through unitised funds such as OEICs or Unit Trusts.

N.B. You can use cash as part of your Stock & Share ISA in particular to avoid losing your allowance.

Accessing investments

Accessing money from your ISA account is easy and can be done at any time. You may cash in all or part of your holdings, or individual funds. Once you have withdrawn an amount or if you close your ISA, this money will lose its tax-free status and you will not be able to put it back into the ISA during that same tax year.

Tessa Only ISAs

This type of account was created for individuals investing the capital from a matured TESSA. They are entirely separate from the normal ISA allowance but you can only put money that had been invested in TESSAs into them. These accounts have now become simply Cash ISAs.

Tax efficiency

The main appeal of ISAs is their tax efficiency. While basic rate taxpayers normally pay tax at 10 per cent on dividend income, this is already taken as a 'tax credit' before you receive the dividend. But if you're a higher rate taxpayer you would normally pay tax on dividend income at 32.5 per cent; you won't get back the 10 per cent dividend tax credit element of this, but you will save tax on the remaining 22.5 per cent.

There are also Capital Gains Tax (CGT) savings. If you make gains of more than £9,600 from the sale of shares and certain other assets in the tax year 2007-2008 you would normally have to pay CGT.

There is no CGT on any gains within an ISA. (However, losses on ISA investments can't be used to reduce CGT on gains from investments outside the ISA.)

There is also less paperwork than with other investments, since you don't have to declare your ISA on your tax return.