How is an ISA different from an ordinary savings account?

Asked by esqueaouz

2 Answers

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Answered by D C, IFA in Bristol, DEVON
Thank you for your question.

First of all, a cash ISA is nothing more than a deposit or savings account with special tax treatment and a few rules.

I shall disregard stocks and shares ISAs, and concentrate on cash ISAS. These are the differences:
1. Cash ISAs have a contribution limit in any one year; this year the maximum is £5640. Deposit (savings) accounts do not have any limits.
2. If you have invested the maximum into a stocks and shares ISA then you cannot take a tax ISA, in that year. Savings accounts are unaffected by whether or not you have a stocks and shares ISA.
3. Interest is paid completely free of tax from a cash ISA. It is a bit more complex for savings account, as follows:
(a) Non-taxpayers can also have their savings interest paid tax-free, just like an ISA
(b) Standard Rate taxpayers will receive their interest less a 20% tax charge
(c) Higher rate taxpayers will receive their interest initially less the same 20% tax charge, but will have to pay more tax on it later.

Those are the main regulations for adult uk residents. As far as the interest rates and other features (such as ease of access to your money) it is a matter of comparing the individual offerings of the various providers.

Best wishes, David | 10.08.12 @ 10:40
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$commenter.renderDisplayableName() — {comment} | 08.18.17 @ 02:52
Answered by Richard Salter, IFA in Trowbridge, WILTSHIRE
You do not have to pay any tax on any profits (dividends or interest) you may earn on cash held on deposit or invested within an ISA. This is particularly valuable to higher and additional rate investors. Even basic (20%) tax payers benefit. If chosen correctly the fact that CASH ISA charges cost no more than none cash ISA accounts (but often pay higher rates of interest) then why would you not save via a cash ISA?

Investment ISAs do have charges - but so do the equivalent assets most investment ISAs buy. So agian these are not typically more costly than none ISA investments. So on a charge basis use your ISA allowances and enjoy the tax freedoms.

Indeed ISAs are so good the Government restricts how much you may place into them each tax year. This is one of the main differences between them and ordinary savings accounts which are often unlimited in the amount you can deposit.

I belive that every adult in the UK should have some form of savings. With CASH ISAs offerring :-

i) tax avoidance,
ii) low or nil charges (early exit charges perhaps),
iii) instant access in many cases
iv) minimal risk and
iv)still some of the best rates of interest payable

Why would you not have a cash ISA?? Use this allowance first - £5,640 per adult per tax year at present and THEN place any extra sums inot other none tax sheltered deposit accounts.

Hope this answers the question

| 10.08.12 @ 17:00
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$commenter.renderDisplayableName() — {comment} | 08.18.17 @ 02:52
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Answered by

D C
D C, IFA in Bristol, DEVON

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