ISAs allow investors to hold cash, equities, and other investments in a wrapper that is free from UK income tax on interest or dividends and also free from UK capital gains tax.

In more detail, the tax benefits are as follows:

• 10% UK dividend tax credit reclaimable until 5th April 2004 in stocks and shares and insurance components of an ISA.
• 20% tax reclaimable on bond interest paid in stocks and shares and insurance component of an ISA.
• 20% tax reclaimable on interest in cash component of an ISA.
• Flat 20% tax charge on interest on cash in stocks and shares and insurance components of an ISA.
• No capital gains tax.
• Tax regime guaranteed until 5th April 2009 and to be reviewed in 2006.
• The tax advantages need to be balanced against additional charges made by some ISA managers.

Freedom from tax is of most value to those who pay higher rate tax on their income and capital gains. The importance of this tax benefit is slightly reduced for the majority of investors who are unlikely to pay capital gains tax and who pay basic rate tax. There is generally no benefit to non-taxpayers in holding an ISA unless their status is likely to change in the future.

The benefits of tax freedom are likely to manifest themselves after a number of years. The longer the duration, the greater the difference in performance vis a vis comparable non-ISA investments.