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Introduction to ISA

6. What does “tax-free” mean?

6. What does “tax-free” mean?

All interest, dividends and bonuses from investments made in an ISA are currently exempt from income tax. Dividends are subject to a deduction at source but the ISA manager will be able to reclaim the 10pc tax credit.

However the pure tax-free status of ISAs is scheduled to be changed from 6th April 2004 as the reclaim of the tax credit on dividends has been stopped by Chancellor Gordon Brown from distributions after that date. Most financial services industry professionals disagree strongly with this move as it goes against the basic concept of the ISA as a simple, tax-free incentive to saving and also introduces distortion. Their view is that income from bonds and deposits is tax-free, so equity dividend income should enjoy equal status. Representations are being made to continue the current position.

All capital gains on investments inside an ISA are exempt from capital gains tax (CGT), however long they are held. Conversely, any capital losses made on stocks or shares in an ISA are not allowable against gains made outside the ISA.

No tax is payable on the proceeds from a life assurance in the ISA, provides it remains a qualifying policy at the time it pays out.

As the amount of cash in an ISA rises, interest is payable on the cumulative amount of cash within it (ie any amount originally invested plus subsequent interest, dividend or bonus credited to it). All interest, and interest on interest, within the ISA is free from income tax.

You can take income from an ISA as you wish and/or take capital gains you have made out of the ISA and you pay no tax upon withdrawal. But remember you cannot put any withdrawals back into an ISA in any year when the full limit has been subscribed.

ISAs do not have to be included on Tax Returns.

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