Tax Exempt Special Savings Account (TESSA)

Introduced by former Prime Minister, John Major when Chancellor of the Exchequer, the TESSA is a no risk tax free way of saving.

It is due to be phased out from April 1999, with no new accounts being opened after the end of the tax year.

There are a number of rules that accompany a TESSA, regardless of where it is opened:

• No more than £9,000 may be paid into the account over a 5 year period.
  
• Within the 5 years, there are maximum limits as to how much may be paid in during any one year.
  These are:-

(The actual amount in year 5 depends on how much has been paid in so far. ie a maximum of £1,800 but restricted if this would take the total of capital paid in to more than £9,000. If the maxima have been paid in during the previous 4 years, then the maximum in year 5 would be £600). Remember also, that it is not usually compulsory to pay in anything other than your opening deposit; a lump sum could be paid in at the start and then nothing added for the duration of the account.

• TESSAs can only be held in sole names, not jointly
  
• A TESSA can only be held by someone aged 18 or over
  
• Only one TESSA can be held at any one time by an individual. To verify this, you must register your National Insurance number.
  
• If the capital (ie. the money paid in) is left untouched until the end of the 5 year term, then the interest is paid without deduction of, or liability for any tax. This is true even if the holder is a higher rate taxpayer.
  
• Some of the interest (equivalent to the amount that would be paid out if tax were to be deducted) may be withdrawn during the term without jeopardising the tax status of the account.
  
• Rather than closing the account down and starting afresh, if the holder wishes to transfer the TESSA from one institution to another - to get a better rate perhaps - then this is permitted.
  
• A TESSA may not be opened by an overseas resident.

Special rules will apply to TESSAs after the introduction of ISAs (Individual Savings Accounts) in April 1999. Click here for more details, or go back to the main investment section.