Saturday, 9 July 2011

What is an ISA? Who knew wrappers could be so much fun?

An ISA (Individual Savings Account) is a tax shelter - like the polytunnel
over your crops or the wrapper around your sweet, the box around your chocolates etc.

So a cash ISA means that you don't pay tax on your interest, like you would have to in a normal savings account. It's still cash in your ISA, its just that the cash is sheltered from any taxes that may be due.

You can have one if you reside in the UK for tax purposes (for most of us that means having a National Insurance number) and are over 16.

A Stocks and Shares ISA means you don't have to pay income tax on your dividends or capital gains tax if the value of your holdings shoot (hopefully) skyward.
Currently, you have to be 18 to have a Stocks and Shares ISA.
A point of note for Stocks and Shares ISAs: Rubbish in = Rubbish out.

A stocks and shares ISA might be a nice, shiny tax shelter but it is just that: a tax shelter. The quality of the underlying holdings that you chose to put in that wrapper is worth a lot of thought. I will explore this more in future posts.
That, in a nutshell of a wrapper, is it.