Individual Savings Accounts (ISAs) were introduced in April 1999 to replace old style PEPs and Tessas. Simply put and ISA is just a tax free wrapper into which you can place either cash or shares. If you have savings or investments then an ISA is an essential component within any portfolio as it saves tax and therefore increases returns.
Stocks and Shares ISAs
Share based investments in various forms are ISA-able. Shares in individual companies may be placed inside what's called a self-select ISA, which are usually managed by stockbrokers. However a more common use of the shares allowance is for collective investment vehicles like unit trusts, OEICs or investment trusts. These are pooled investments where a fund manager picks a selection of shares based on geographic or sector criteria and the value of the investment depends on the collective performance of the shares picked. As well as holding shares (equities), stocks & shares ISAs can also invest in property funds and bonds (such as gilts, corporate bonds and high yield bonds).
Placing investments inside an ISA wrapper provides two potential tax advantages. The main benefit is that any capital growth can be returned to you free from capital gains tax. If you fund invests in bonds then the fund manager can also reclaim all tax paid on the interest yield.
Cash ISAs
Cash ISAs are simply savings accounts where the interest isn't taxed. They mainly offer instant access to your money but some Fixed Term Cash ISAs are also available where withdrawals will be restricted.
Investment Allowances
To be eligible for an ISA you have to be at least 16 years old for a Cash ISA and 18 years old for a Stocks & Shares ISA. The maximum amount you can invest in an ISA in any one tax year increases each year in line with inflation. In 2011/12 tax year the maximum allowance is £10,680 per person, £5,340 of which can be saved in a Cash ISA.