Tax benefits, contribution limits and withdrawls

Investments into an Isa are made from after-tax income, but holdings within an account are protected from further income tax and do not attract capital gains tax. Holdings accumulate year-on-year, so while there is a limit on what can be saved in one year the entire unlimited holding continues to benefit from tax relief in perpetuity.

There are two firms of adult Isa: a simple cash account for those aged 16 and over, and a stocks and shares version available to those aged 18 and over.

The 2013 to 2014 overall subscription limit for adult Isas is £11,520, which you can hold entirely in a stocks and shares Isa or split between the two. The maximum that can be subscribed in a cash Isa alone this year is £5,760. These rates will rise to £11,880 and £5,940 respectively for the 2014/2015 financial year.

The tax relief on a cash Isa is simple: with a standard savings account taxpayers have to pay their marginal rate of income tax on any interest earned; a cash Isa is exempt from this charge. This means the saver avoids a tax bill of between 20 per cent and 45 per cent on accumulated interest on the entire account holding.

Cash Isas come in various forms from instant access to fixed-term and notice variations depending on how regular the saver wishes to be able to make withdrawals, and interest rates will vary in the same way as with standard accounts - more restrictions means more interest. There is no limit on the withdrawls that can be made to retain the tax relief.

With stocks and shares Isas there is a 10 per cent cap on income earning from the underlying investments, meaning higher and additional-rate taxpayers enjoy a substantial discount to what would otherwise be a charge of either 22.5 per cent or 32.5 per cent respectively.

Savers also do not have to pay any capital gains tax on profits made from share price increases - avoiding charges of 18 per cent or 28 per cent for investment held outside of an Isa - and there is also no tax on interest earned on bonds.

An individual can take money out of an adult Isa at any time without losing tax relief, subject to any conditions on the specific account, but terms and conditions will vary among managers. Withdrawals are not counted against savings limits.

So if a client subscribed £2,500 to a cash Isa on 1 May 2013 and withdraw £1,000 on 3 December 2013, Mr Morris explains they could have made further subscriptions to that Isa to the end of the tax year of £3,260 before reaching the annual subscription limit.

As for junior Isas (Jisas), which replaced child trust funds and are available in both cash and stocks and shares options for under-18s, the key difference is that withdrawals from Junior Isas are not permitted except in exceptional circumstances such as terminal illness. At 18, the Isa will convert to an adult Isa.

Income generated from parental subscriptions to a Junior Isa (also known as Jisa) does not count toward the parent’s income under the settlements legislation (section 629 ITTOIA 2005).

For inheritance tax purposes, gifts made by a parent to a Jisa are treated in the same way as any other gifts they make. Parents must simply be UK resident for tax purposes or, if not, a Crown employee working abroad.

Peter Shipp, director of investment schemes for the Tax Incentivised Savings Association (Tisa), says you can also transfer existing Isas to other managers to get better rates or seek higher returns.