Tax-exempt special savings account

In the UK, the tax-exempt special savings account (TESSA) was one of a number of tax-free savings accounts. The TESSA was announced by John Major in his only budget as Chancellor of the Exchequer in 1990 (a budget for savings). The TESSA was intended to be a low-risk complement to the personal equity plan (PEP) which would be attractive to a wider range of savers.

Qualification

An individual aged 18 or over was able to open a TESSA with a bank, building society or other financial institution from 1 January 1991 to 5 April 1999. A specific requirement was the presentation of the applicant's National Insurance number, facilitating identification to taxation, for the purpose of ensuring only one TESSA (tax free) account investment could be operated by the individual per year. Interest on the TESSA was free from UK income tax. The favourable tax treatment of a TESSA lasted for 5 years, and it was possible to invest up to £9,000, with a maximum investment of £3,000 invested in the first year and £1,800 in each of the second to fifth years (although, if the maximum was invested in the first four years, only £600 could be added in the fifth year). Withdrawals were permitted within the first 5 years: tax relief was clawed back if any of the invested capital was taken out; withdrawals of interest did not trigger a clawback of the tax relief.

Development

'Follow-on' TESSAs were introduced in 1995 to permit all of the capital (but not the tax-free interest) from an original TESSA to be 'rolled over' into a new TESSA. Other than permitting all of the capital in the original account to be invested in the first year, which could easily exceed the usual £3,000 first-year limit, a 'follow-on' TESSA was subject to the same conditions as any other TESSA.

Phasing out

TESSAs were replaced from 1999 by Individual Savings Accounts (ISA). The final TESSAs matured on 5 April 2004, but the original capital (but not the tax-free interest) could again be 'rolled over' into a new notional income tax-free investment through use of a TESSA only ISA (TOISA). The TOISA was a form of cash ISA which can be opened using either capital that was originally invested in a TESSA and that has not been withdrawn, or with funds transferred from another TOISA.

From 6 April 2007 there was no practical difference between TOISAs and cash ISAs and transfers into cash ISAs have been permitted. On 5 April 2008, TOISAs ceased being legally distinct and are now completely interchangeable with cash ISAs.