Four steps to the perfect ISA

Published by Nathalie Bonney on 15 December 2010.
Last updated on 17 January 2011

4 steps

1. The basics

Everyone over the age of 16 has an annual cash ISA allowance of £5,100, and when you turn 18 you'll be awarded a further £5,100 stocks and shares ISA allowance.

It's possible to invest the full £10,200 in a stocks and shares ISA instead of splitting it between cash and shares; however, you can't invest more than £5,100 in a cash ISA.

Your yearly limit runs from April to April, in line with the tax year, and the deadline for this tax year is 6 April 2011. From this date the ISA limit will also change, increasing in line with the retail prices index each year.  

2. The benefits

Any interest you earn on your cash ISA is tax-free.

For stocks and shares ISAs, it's a bit more complicated, but there is no further tax to pay on dividend income and any gains made if you sell your investment aren't subject to capital gains tax. Additionally, you don't have to include your ISA details on your personal tax return.

Read our round-up of the best cash ISA rates

3. How to pick an ISA

There are plenty of different products to choose from. With cash ISAs, you should decide whether you want instant access to your money or you're happy to lock it away for a set period in a fixed rate ISA.

Fixed-rate ISAs tend to be slightly higher than instant-access ones, although you will need to pay in a lump sum, whereas you can make smaller regular payments into an instant-access ISA.

More care is needed with stocks and shares ISAs. A self-select ISA does what it says on the tin and is only for people with some investment experience.

Otherwise, pick an ISA that offers a variety of funds. An independent financial adviser can help you find one that suits your attitude to risk and investment goals. A more low-cost option is to use a fund supermarket. 

4. Chase the rates

Keep an eye on cash ISA rates. If the interest rate becomes uncompetitive, you can transfer to a better-performing one.

Don't just withdraw your money from one account to pay into another, as your money will lose its tax-free status and be treated as a new subscription for 2010; ask the new provider or ISA manager to arrange the transfer.

Remember: some ISAs won't accept transfers and others charge for the service. 

NOTE: you can't open more than one cash and one stocks and shares ISA in any tax year.


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