Tax Efficient Saving - ISAs and ‘Junior ISAs’

Tax Efficient Saving - ISAs and ‘Junior ISAs’
Individual Savings Accounts (ISAs) are a great option for tax-efficient saving because income and gains are exempt from tax. From April 2011, it is possible to save up to £10,680 a year in an ISA, of which half (£5,340) may be held in a cash ISA. Up to £10,680 may be held in a stocks and shares ISA (but less amounts invested in cash ISAs).


ISAs are designed to be as flexible as possible. There is no minimum level of saving, and no requirement to hold the investment for a minimum period. In addition, there is no ‘lifetime’ investment limit. Accounts can hold cash, certain stocks and shares, certain collective investment scheme units, certain life insurance policies, certain stakeholder products and National Savings in a single account.


ISAs are intended to be as accessible as possible. Withdrawals may be made at any time without loss of tax relief, but once a withdrawal is made a further deposit are not possible to make up for it once deposits have already been made up to the allowed limits.

To open an ISA an individual has to be aged 18 or over (or over the age of 16 for cash ISAs) and resident and ordinarily resident in the UK for tax purposes.


Junior ISAs

On 26 October 2010 the government announced plans to introduce new ‘Junior ISAs’ (referred to in the legislation as ‘investment plans for children’ or ‘child plans’). This new type of account has been available from providers since 1 November 2011 for UK resident children (under 18s) who do not have a Child Trust Fund (CTF) account. Junior ISAs are tax-relieved and will have many features in common with existing ISA products. They are available as a cash or stocks and shares product.


Key features of the accounts can be summarised as follows:


• children living in the UK, who do not have a Child Trust Fund account, will be eligible for Junior ISAs;

• other people (such as parents or grandparents) will be able to make contributions into the child’s cash account or ‘stocks and shares’ account on behalf of the child;

• each child will be able to have one cash and one ‘stocks and shares’ Junior ISA at any one time;

• there will be a total annual limit of £3,600 for all payments into these accounts;

• Junior ISA accounts will become ‘adult’ ISAs when the child is 18.


As with Child Trust Funds, the following rules apply to Junior ISAs:


• Although the account will belong to the child, the child will not be able to withdraw money from it until they are 18;

• the child can become responsible for the account when they are 16;

• interest earned on the money held in the account will be paid tax free;

• a range of banks, building societies, credit unions, friendly societies and stock brokers offer Junior ISA accounts.


Practical Tip

Spouses and civil partners each have their own subscription limits, which means that couples can currently save up to £21,360 per annum and receive a tax-free return on their investment. Moreover, a family with say, two children, investing in ISAs and Junior ISAs, could save up to £28,560 per annum (although parents need to remember that the income held in a Junior ISA belongs to the child).


Sarah Laing