An Individual Savings Account (ISA) is a kind of financial investment which is made available to residents of the United Kingdom. Designed to encourage personal savings by providing people with the incentive of a more favorable tax status, ISAs are, essentially, savings accounts where the interest earned is not taxed. Generally, there are two kinds of ISAs: the cash ISA and the stock or shares ISA. Each tax year, which runs from April 6 to April 5 (of the following year) in the UK, every individual over the age of 16 is given an "allowance." This allowance is the maximum amount of money, in cash or stocks, a person is allowed to place into a tax-free ISA each year.
A shares ISA is a kind of ISA that primarily holds stocks and shares. There are a variety of rules that govern the investment held in a shares ISA. The stock or shares, for example, in an ISA are tax-free. Cash, on the other hand, that is held in a stock or shares ISA is designated as “cash awaiting investment” and is subject to a flat charge of 20%. Dividends, interest earned, and capital gains, however, is tax exempt. Unused portions of an individual’s annual allowance do not rollover into the next tax year. There are also specific rules which govern the movement of assets when they are invested in an ISA. These rules are usually outlined by the terms of each individual’s ISA. Most ISAs, however, allow access to money deposited within the ISA without losing tax-free status.
ISAs were designed to replace Tax Exempt Special Savings Accounts (TESSAs) and Personal Equity Plans (PEPs). These earlier plans were often criticized for favoring middle class investors above others. When ISAs were first created, two types were available: the Mini ISA and the Maxi ISA. However, for purposes of simplification the distinction was phased out in the 2008-2009 tax year. Mini cash ISAs, which allowed investors to hold cash and shares separately, were converted into “Cash ISAs.” Mini shares ISAs were converted into “Stocks and Shares ISAs.” Maxi ISAs, which allowed investors to bundle cash and shares together, were split into the two components of cash or shares.