What is an ISA?

The ISA is simply an account or wrapper into which the Government allows you to put your investments to protect them from tax. Some people invest for growth, some for income - the ISA is a fantastic way to invest for both. After you open your ISA accounts, under current tax rules you do not have to pay Capital Gains Tax (CGT) or any further tax such as Income Tax, on the income you receive from your investment.

If you send the taxman a self assessment form each year, you do not even have to tell him about your ISA savings and investments. Something else many people find really attractive about ISAs is their flexibility. The knowledge that you can access your ISA money if you really need to can make

the difference for some people between saving and not saving.

There are two types of ISA; Cash ISAs and Stocks and Shares ISAs. The principle of each is the same; they are just designed to hold different investments.

ISA benefits

No Income Tax

No Capital Gains Tax

Easy access

Flexibility to invest monthly or one-off lump sums

Choice – you decide what you want to shelter from the tax man

Why an ISA

Quite simply, because the ISA is one of the most generous handouts from the Chancellor. Over the years, an ISA could save you thousands of pounds that you would otherwise have had to pay in tax. In an era when the upward pressure on tax seems to be relentless, this is doubly important.

Every time taxes rise, the ISA tax break gets even more valuable. Just to give you an idea of how high

taxes have become, consider this. Your total tax bill, including Income Tax, National Insurance and VAT is much higher than the 20% or 40% headline rate. If you are a basic-rate tax payer and work from nine to five, taking an hour for lunch at noon, every penny you earn until just past 1pm is paid to the Treasury one way or another. If you are a high-rate tax payer, you only start working for yourself at 1.45pm. Any break you can get from tax is really worth grabbing hold of.

How much can I save?

Because of the tax break, the Government limits how much you can invest in each tax year but the annual cap has been set at a level well above what most people choose to save each year. This financial year, 2010/11, the maximum is £10,200 and the Government has said that the limit will rise

each year in line with inflation. And that limit is for an individual. A couple can save twice as much – £20,400 this year – so this really is a meaningful tax incentive.

For the tax year 2011/12, the new ISA allowance 2011 will be £10,680 from 6 April 2011. Please note that the value of tax savings and eligibility to invest in an ISA depends on individual circumstances and all tax rules may change in the future.