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ISA rates and rules explained

Individual Savings Accounts (ISA) allow savers to invest tax-free, as there is no capital gains tax or income tax to pay on any savings. This is a great benefit to savers, particularly in this depressed marketplace. So what are the rules and how can different ISA interest rates be explained?

Types of ISAs

There are two types of ISAs available to savers: cash ISAS and Stocks and Shares ISAs. Cash ISAs allow up to £5,640 to be saved tax free each year. A fixed rate cash ISA will give you the best interest rate, but if you want access to the funds, an easy-access ISA is the one to go for.

Stocks and Shares ISAs offer the highest saving amount, as £11,280 can be put into these. Again there are two choices to make. The best option for first time savers is Pre-Selected Fund ISAs. These ISAs are created using funds researched by investment experts. But if you have knowledge of the markets, then a Self-Selected Fund ISA may be the way to go.

How much can be invested?

Up until 5th April 2013, savers can put away up to £11,280 without having to pay any tax on the resultant interest. Savers can only use this maximum amount through Stocks and Shares ISAs or by taking their cash maximum of £5,640 and another £5,640 in stocks.

Different ISA interest rates explained

Although all ISAs offer the same tax saving benefits, they don’t offer the same interest rates. ISA rates vary so like any other saving account you will have to shop around to get the best deal.

Final word

ISA rates can be explained quite simply. If you want access to the funds held within the ISA, the interest rate will be lower, so ISAs work best if you can afford to be without the money for a fixed term. The interest rates also differ depending on the financial institution you invest with, so it pays to shop around.

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