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ISAs, PEPs and TESSAs Guide
About this Guide
ISAs (Individual Savings Accounts)
Your Querstions Answered
What Happens If...
Other Questions
Some More Points in Detail
TESSAs (Tax Exempt Special Savings Accounts)
PEPs (Personal Equity Plans)
Getting more help and advice

Guide to ISAs, PEPs and TESSAs

TESSAs (Tax Exempt Special Savings Accounts)

A TESSA is a special bank or building society account that offers tax-free interest provided the account is maintained for a fixed period of five years. So as long as you leave your savings in the account over that period any interest, dividends or bonus earned will be totally free of tax.

TESSAs have been replaced by cash ISAs and no new TESSAs could be opened after 5 April 1999. TESSAs opened by that date can continue to run to maturity under the normal TESSA rules.

The information that follows is for savers who already have TESSAs.

How much can be saved in a TESSA?

Up to £9,000 in total can be saved in a TESSA over five years, but there are limits to the amount that can be deposited each year. Up to £3,000 could be deposited in the first year and no more than £1,800 in each later year. Each TESSA year begins on the anniversary of the date the account was opened.

Example

Year
Amount deposited £
1
3,000
2
1,800
3
1,800
4
1,800
5
600
Total
9,000

In this example you cannot deposit more than £600 in year five because of the £9,000 overall limit.

There were special rules for follow up TESSAs. These TESSAs were opened after an earlier TESSA had matured. Under these special rules, the first year deposit limit was £3,000 or the amount deposited in the earlier TESSA (up to £9,000, but excluding interest or bonuses) if this was greater. The deposit limits of £1,800 in later years, and the overall deposit limit of £9,000 over the five years, are the same for any other TESSA.

When can I deposit money in a TESSA?

You may deposit money in your TESSA as often as you like, but once you reach the yearly deposit limit you must wait until the next year before you can deposit any more.

If I do not deposit the full amount in any year can I make it up later?

If you do not deposit the full amount in any year, you cannot carry the difference forward to a later year. You can only make up the shortfall within the normal annual limit of £1,800.

Can I withdraw any money from my TESSA before the five years are up?

Yes. You can withdraw some of the interest (but the bank or building society must retain a sum representing the income tax that would be due on a normal taxable account (20%)). This sum is not paid over to the Inland Revenue, but stays in the account until the end of the five years. You can then withdraw it without losing the tax exemption.

Example

Andy deposited £1,000 in a TESSA on 5 April 1999. If the bank or building society pays interest at 5% he will get £50 interest in a year. The maximum amount Andy can withdraw without losing the tax exemption is £40. This is calculated as follows.

  £
Interest credited
50
less tax at the lower rate (20%)
-10
 
The maximum amount Andy may withdraw
40
The sum remaining in the account is £1,000 + £10 = £1,010

Can I withdraw interest at any time in the five years?

Yes, if the bank or building society's TESSA terms and conditions allow withdrawals. You can withdraw as much of the interest (less the amount representing income tax) as you like at any time without losing the tax exemption. You can withdraw all the money deposited, and all the interest tax-free, at the end of the five years.

Can the account lose its TESSA status?

The account will cease to be a TESSA if you

  • close the account before the end of the five-year term
  • deposit more than is allowed in any year
  • withdraw any of the money you deposited before the five years are up
  • withdraw too much interest before the five years are up.

If you do any of these things, then the account will cease to be a TESSA and it will lose its tax-exempt status.

What happens if the account ceases to be a TESSA?

If the account ceases to be a TESSA, all the interest earned is taxable in the year it ceases. The bank or building society will deduct tax from the interest at 20%. If you pay tax at the higher rate of 40%, you will have some further tax to pay on the interest.

Must I include this interest in my tax return?

Yes, if the account loses its tax-exempt status you must include the interest in your Tax return, if you receive one. If you do not get a Tax Return, and you are liable to pay tax at the higher rate, you must tell your Tax Office.

What if I do not pay tax or pay tax at the starting rate?

If you are not liable to pay tax or if you pay tax at the starting rate of 10%, you may be able to claim back some or all of the tax deducted. The Inland Revenue booklet IR110 A guide for people with savings gives more information on how to claim.

What happens if I die before the end of the five-year period?

No tax will be charged on the interest paid up to the date of your death, but the account cannot continue as a TESSA after that date and any interest paid after that date will be taxable.

Transferring a TESSA

Can I move my TESSA to a different bank or building society during the 5 yrs?

Yes, but to keep the tax exemption, you must ask the new bank or building society to transfer the account for you. If you try to move the account by withdrawing any money you will break the rule that the money deposited must remain in the account. That will mean all the interest earned will be taxed.

Your current bank or building society cannot refuse to transfer your TESSA to a different bank or building society. However, their terms and conditions may mean you lose some interest or bonuses if you do. Banks and building societies are not obliged to accept transfers to them.

What happens after five years when my TESSA matures?

All the interest and bonuses earned up to that date are tax-free and you can withdraw the money without restriction. At maturity the account ceases to be a TESSA and any further interest and bonuses are taxable in the normal way. Can I transfer my TESSA money into an ISA? Yes. Once your TESSA has matured you can choose to transfer the money you deposited in the TESSA (but not interest or bonuses) into the cash component of an ISA. This is on top of your normal annual lSA limits. You can transfer the money from your TESSA into

  • the cash component of a new or existing Maxi ISA
  • a new or existing cash Mini ISA, or
  • a special lSA, called a TESSA-only ISA, which is set up solely to receive money from a matured TESSA. You must do this within six months of the date the TESSA matures.

Does the ISA have to be with the same bank or building society?

No. You can use any ISA manager who offers a TESSA only ISA, a cash mini ISA or the cash component of a maxi ISA.

If the TESSA and the ISA are managed by the same bank or building society they will know how much you can transfer. If your new ISA manager is not the same as your TESSA provider, then the ISA manager will ask you to obtain from your TESSA provider a maturity certificate showing the date of maturity of the TESSA, and the amount you deposited.

Do I have to transfer the whole amount?

No, you can put in as much or as little as you like, but you cannot put in more than the amount you deposited in your matured TESSA, excluding interest or bonuses.

What about the interest from the TESSA?

Interest and bonuses from the matured TESSA can be subscribed to any ISA (except a TESSA only ISA) within the annual lSA limits.