An Individual Savings Account (ISA) is a tax-advantaged means by which investors may save and invest without incurring income or capital gains taxes on the proceeds. An ISA is not an investment in itself. So it is not appropriate to say "I've invested in an ISA", or "What is the best-performing ISA?" What you should think is "What can I invest in using the ISA wrapper?"

What Can I Invest In Inside the ISA Wrapper?

Within an ISA wrapper you can invest in a combination of the following types of asset: cash deposits, stocks and shares and life assurance investments.

• Cash deposits: qualifying investments include bank and building society deposits, and money market unit trusts. Some National Savings products are also included, as well as a range of existing bonds and accounts on which tax is normally payable.
• Stocks and shares: The equity element in an ISA may include any authorised unit or investment trust or open ended investment company (OEIC), as well as any share quoted on a stock exchange recognised by HM Revenue and Customs.

What are the tax benefits of an ISA?

An ISA will allow you to invest on a tax-efficient basis each year. There is no tax relief on money put into ISA's on entry, unlike contributions to a pension scheme. Instead, you are not liable to pay income or capital gains tax on the proceeds of an ISA and the investments you hold within an ISA grow free of income and capital gains tax.

However, changes to the taxation of company earnings mean that ISA managers may no longer reclaim the 10% tax credit on dividend income. This acts to reduce the attractiveness of equity investments within ISA's to basic rate taxpayers. Higher rate taxpayers have no further income tax liability. Interest from deposits and from corporate bonds attracts a 20% tax credit.

Investments held within ISA's are not liable for capital gains tax. ^*