The rules on what can be invested in an ISA have been simplified since the March 2008 Budget. The maximum which can be invested in any tax year in an ISA is £7,200. Once you have invested up to your limit and you subsequently withdraw money you cannot simply put it back later in the year. You also need to be over 18 and resident in the UK.

 

 

 

 

April 5th, 2009 marks the end of the tax year. By this date you should have decided whether you will be making any payment into an Individual Savings Account for the 2008/2009 tax year.

There is now no distinction between a Maxi ISA and a Mini ISA.

 

The overall ISA allowance is £7200. That can be made up with all equities, or a mixture of cash and equities. The annual limit for a cash ISA is £3600.

 

Up till April 2004, capital growth and income from equity investments held in an ISA were free of tax and any benefits from approved life insurance policies could also accrue tax-free. Now the tax credit on dividends within equity ISAs has been scrapped. You don't have more income tax to pay, but your fund manager will not be able to reclaim the credit of 10%.

 

This is affecting fund returns to the tune of around £150m a year. Effectively this means that annual dividends on a typical equity income fund are now more than 0.3% lower.

 

Most experts nevertheless think it is still worth holding ISAs. All assets held within an ISA will remain exempt from CGT (Capital Gains Tax). So not only is there no need to inform the Revenue when you sell your holdings, you can trade freely within the ISA without worrying about CGT liabilities. You don't have to declare an ISA on your tax return. 

 

For higher rate taxpayers, the dividend tax benefits are also definitely worth having. Higher rate taxpayers effectively save 22.5% in income tax on dividends paid within an ISA. And if ISA assets are held within corporate bonds, all income is tax-free.