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Individual savings accounts (ISAs) were introduced on 6 April 1999, replacing tax-exempt special savings accounts and personal equity plans. In 2012-13 alone some 14.6 million adult ISAs were subscribed to (up from 14 million the previous year), with around 80% of the subscriptions being to cash ISAs – approximately £57 billion was invested.

From 1 July 2014, ISAs have been reformed into a simpler product called the new ISA or NISA. All existing ISAs have automatically became NISAs. The introduction of junior ISAs has extended availability to children, and around 295,000 junior ISAs were subscribed to in 2012-13.

Tax advantages

Interest, bonuses and dividends received are free of income tax, although the 10% tax credit on dividends cannot be reclaimed. Gains are free of capital gains tax, although the benefit of capital losses is lost.

The tax advantages are obviously greater for people paying tax at the higher rates. For example, the best interest rate currently available (July 2014) for a fixed term cash NISA is around 2.75%, although rates are much lower for instant access accounts (around 1.50%). This is an effective gross rate of 4.58% for a higher rate taxpayer, and 5.00% for an additional rate taxpayer.

Funds can be withdrawn from NISAs at any time without the loss of tax relief, although the interest rate for many cash NISAs includes a bonus that is only payable if the investment is left untouched – typically for 12 months.

And normally where investment is made for a fixed period, withdrawals will result in the loss of interest, and in some cases the only way to make a withdrawal is to close the account.

It is not necessary to declare income and gains received from NISAs on a self-assessment tax return. NISA income does not result in the loss of the higher personal allowances available to those born before 6 April 1948, or the normal personal allowance for those with income in excess of £100,000.

NISA income is also not included for tax credit or universal credit purposes, and is also ignored when it comes to the child benefit tax charge.


Only individuals can open NISAs (they cannot be held jointly by spouses or civil partners, held on behalf of anybody else, or held in trust), and normally an individual must be resident in the UK. If someone goes to live abroad then they can keep their existing NISAs, but cannot pay in any more money.

NISAs cease to be tax-exempt from the date that an individual dies, and the tax exemption does not extend to inheritance tax – they form part of a person’s estate.

The minimum age limit for cash NISAs is 16, and for stocks and shares NISAs it is 18. However, if a parent contributes towards a cash NISA held by a child aged 16 or 17, then the income can potentially be taxed as the parent’s and therefore not be tax-free.

Junior ISAs can be opened by parents for children under 18 who do not have a child trust fund - most children born between 1 September 2002 and 2 January 2011 will have a child trust fund. Anyone can contribute towards a junior ISA, including parents, family members and friends. In the case of parents, the income will always be treated as the child’s. No withdrawals are normally permitted until a child reaches 18, and at that age a junior ISA will automatically convert to a NISA.

Investment limits

Each tax year an individual can open one cash NISA and one stocks and shares NISA, which do not need to be with the same provider. For 2014-15, the overall investment limit is £15,000, with this limit being completely flexible. A person could therefore invest £15,000 in a cash NISA, or £15,000 in a stocks and shares NISA, or in any combination of the two – such as £10,000 in a cash NISA and £5,000 in a stocks and shares NISA. It is even possible to have just one NISA holding both cash and stocks and shares, although most people will probably prefer to keep the two types of investment separate. The NISA investment limit increases each year in line with the consumer price index.

A problem can arise where someone opens a cash NISA but does not invest the full £15,000. This is because many fixed rate NISAs do not permit the account to be topped up, whilst others do not allow further investment once they have been taken off the market. Surprisingly, HMRC seem to turn a blind eye to investors opening a second cash NISA in order to utilise the balance of their investment limit, provided they are not repeat offenders.

With junior ISAs the overall investment limit for 2014-15 is £4,000, and this limit can also be split between a cash junior ISA and a stocks and shares junior ISA as desired. However, it is only possible to hold one cash junior ISA and one stocks and shares junior ISA at any one time. It is not possible to open new accounts each year. Somewhat surprisingly, there is no interaction between junior ISA and NISA investment limits. Therefore, someone aged 16 or 17 can benefit from both the overall junior ISA limit of £4,000, and the cash NISA limit of £15,000.

The investment limits are once only – for example, if £15,000 is put into a cash NISA during 2014-15 and then £2,000 is subsequently withdrawn, it is not then possible to make any further investment during 2014-15. The deadline for using the 2014-15 NISA allowance is 5 April 2015.

Permitted investments

The investment in a cash NISA will normally be in the form of a cash deposit with a bank or building society, although NS&I also offers a direct cash NISA.

Within a stocks and shares NISA it is possible to hold any shares listed on a recognised stock exchange anywhere in the world, government and corporate bonds, unit trusts, open ended investment companies (OEICS), investment trusts, shares listed on the alternative investment market (AIM), and core capital deferred shares issued by building societies (a new form of equity which can be issued by mutual societies), but not unquoted shares, options or futures. However, many NISA providers only offer a limited choice of investment funds – often just the funds managed by the provider itself.

To have access to the full range of qualifying investments it will probably be necessary to have a self select NISA with a stockbroker, and even then the choice may be restricted, for example, to just FTSE 350 companies.

Subject to certain conditions, shares can be transferred into a NISA from a HMRC approved employee share scheme, but it is not possible to transfer windfall shares or inherited shares since subscriptions must be in the form of cash. It is also possible to hold cash and certain life assurance policies within a stocks and shares NISA.

With minor exceptions, the same range of investments are permitted in cash junior ISAs and stocks and shares junior ISAs.


All types of transfer are permitted:

  • Money in an existing cash NISA can be transferred to a cash NISA with another provider. This may be to obtain a better rate of interest, or maybe to consolidate various old NISAs into just one account. Alternatively, the transfer can be to a stocks and shares NISA either with the same provider or a different one.
  • Investments in a stocks and shares NISA can be transferred to another stocks and shares NISA with another provider. This assumes that the new provider will accept the investments that are held in the existing NISA, which will often not be the case if only a limited range of investment funds are offered. Alternatively, the transfer can be to a cash NISA either, with the same provider or a different one.

Where a transfer is in respect of savings for previous years, then a partial transfer is permitted. However, the whole amount must be transferred if it is a transfer of current year savings – that is savings made on or after 6 April 2014. When swapping NISA providers, transfers must be made directly between the two NISA managers. If a NISA is closed and then reinvested, it will use up the investment limit for the current year - transfers do not affect the investment limit.

The rules are essentially the same for junior ISAs. However, when making transfers the restriction that only one account of each type can be held at any one time must be complied with – so if money in an existing cash junior ISA is transferred to a new cash junior ISA, all of the funds in the existing account must be transferred.

It is not currently possible to transfer the savings in a child trust fund to a junior ISA, but such transfers will be permitted from April 2015.

The right choice?

There are normally no charges involved with a cash NISA, but an individual must be careful and not just focus on the tax saving. A survey in 2011 found that the Halifax was paying gross interest of 3.35% on its one year fixed rate bond, but just 2.00% on a similar cash ISA. Even higher rate taxpayers would have been marginally better off with the non-ISA account (3.35% less 40% income tax is a net return of 2.01%).

A review of savings accounts currently offered by some of the major high street banks and building societies indicates that this is no longer the case - the Halifax is actually paying higher rates on its fixed rate cash NISAs compared to similar non-NISA savings accounts. Generally, cash NISAs are probably the right choice for everyone except for non-taxpayers, although it pays to shop around as interest rates vary widely between providers.

It can be much more difficult in deciding whether a stocks and shares NISA is the right choice. Charges will vary according to the type of investment, and also between providers. However, annual management fees for self select stocks and shares NISAs are now extremely competitive, and for many fund type NISAs the charges are no different to if the investment was made outside of a NISA.

As far as income tax is concerned, there is no benefit to receiving dividends within a stocks and shares NISA for basic rate taxpayers as the tax credit cannot be reclaimed. There is no capital gains tax benefit if gains would otherwise be covered by the annual exempt amount (currently £11,000).

Stocks and shares NISAs will therefore be most appropriate for higher and additional rate taxpayers who already have sufficient gains to make use of the annual exempt amount. In addition to avoiding the higher or additional rate income tax liability on dividend income, they will also save capital gains tax at the higher rate of 28%. However, a stocks and shares NISA may be appropriate for a basic rate taxpayer where they invest in interest bearing investments such as corporate bonds, since interest received will be tax-free – saving tax at 20%.