Individual savings accounts

Individual savings accounts (ISAs) should not be viewed as investments in themselves: they are 'wrappers' or 'baskets' which contain the underlying investments. These tax shelters protect your investments from some elements of tax. The underlying investments fall into two categories:

Cash. With a cash ISA your money is placed in deposit accounts (e.g. with banks or building societies) or National Savings products. Some have quick access, others require notice to withdraw your money.

Stocks and shares. This covers shares, unit trusts, investment trusts, open-ended investment companies, life insurance policies, corporate bonds, and gilts. It excludes shares traded on the Alternative Investment Market (AIM).

The tax benefits of ISAs are as follows: There is no capital gains tax to pay on investments held in the ISA. Tax is not deducted from interest paid from, say, bank accounts.

Unfortunately, one of the benefits of ISAs has been removed: dividends on shares (and unit trusts etc.) will be taxable in the normal way for a basic rate taxpayer. That is, the 10 per cent tax paid on dividend income from the company cannot be reclaimed. However, higher rate taxpayers are still exempt from paying additional tax on dividend income from ISA investments - thus saving an amount equal to 22.5 per cent of the gross dividend.

With ISAs you can either put the entire annual limit of 10,200 into an equity ISA, or put 5,100 into a cash ISA and the remainder (E5,100) into stocks and shares.4 Once your money is in a cash ISA you are permitted to transfer it to an equity ISA, but you cannot transfer money the other way.

4 These new limits are restricted to benefit only investors aged 50 or over until 5 April 2010 - thereafter they are extended to others.