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Cash ISA – full steam ahead for tax-free saving

It’s never too early or too late to get into the habit of saving. Whether you are just taking the first steps into an independent adulthood, heading towards retirement or somewhere in between, there is a savings account that allows you to invest cash safe in the knowledge that you will not pay tax on any benefit.

The Individual Savings Account (ISA) receives favourable tax treatment as it is a device introduced by the government to encourage more people to save. However, because it was created by government legislation it can also be modified and even discontinued if deemed appropriate.

There are two types of ISA – the Cash ISA and the Stocks and Shares (Investment) ISA. Cash ISAs can be opened by UK residents aged 16 and over, whereas you must be at least 18 to invest in a Stocks and Shares ISA.

The amounts that can be invested in ISAs vary according to age. Sixteen and 17-year-olds can invest up to a maximum of £3600 per tax year only in a Cash ISA. Anyone 18 years old and over and born after 6 April 1960 can currently save a combined total of £7200 per tax year in ISAs, with a maximum of £3600 invested in a Cash ISA.

However, from 6 October 2009 until 6 April 2010 anyone born before 5 April 1960 can invest a higher combined total of £10,200 in ISAs, with a maximum of £5100 deposited in a Cash ISA. It is a limited time offer as from 6 April 2010 the higher investment limits will apply to everyone aged over 18.

There are two types of ISA to suit the requirements of investors. Those who want to build a cash sum that returns a reasonable level of interest without speculating can invest in a Cash ISA. Some banks and buildings societies offer a fixed-rate Cash ISA and most offer a variable rate Cash ISA; both of which are subject to the maximum deposit levels.

Alternatively, those who wish to risk investing in the stock market can opt for a stocks and shares ISA. This method of investment can offer potentially higher returns dependent upon the performance of the stock market. However, because the value of stocks and shares can fall as well as rise, there is also the potential for the Stocks and Shares ISA to fall in value.

Whichever ISA you choose, the main benefit is that any interest or increase in value is entirely tax free – certainly an excellent reason for investing!