Tax-Exempt Special Savings Account
Encyclopedia
In the UK
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...

, the Tax-Exempt Special Savings Account (TESSA) was one of a number of tax-free savings accounts. The TESSA was announced by John Major
John Major
Sir John Major, is a British Conservative politician, who served as Prime Minister of the United Kingdom and Leader of the Conservative Party from 1990–1997...

 in his only Budget
Budget
A budget is a financial plan and a list of all planned expenses and revenues. It is a plan for saving, borrowing and spending. A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods...

 as Chancellor of the Exchequer
Chancellor of the Exchequer
The Chancellor of the Exchequer is the title held by the British Cabinet minister who is responsible for all economic and financial matters. Often simply called the Chancellor, the office-holder controls HM Treasury and plays a role akin to the posts of Minister of Finance or Secretary of the...

 in 1990 (a budget for savings). The TESSA was intended to be a low-risk complement to the personal equity plan (PEP
Personal Equity Plan
In the United Kingdom a Personal Equity Plan was a form of tax-privileged investment account. They were introduced by Nigel Lawson in the 1986 budget for Margaret Thatcher's Conservative government to encourage equity ownership among the wider population. PEPs were allowed to contain collective...

) 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
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...

, building society
Building society
A building society is a financial institution owned by its members as a mutual organization. Building societies offer banking and related financial services, especially mortgage lending. These institutions are found in the United Kingdom and several other countries.The term "building society"...

 or other financial institution
Financial institution
In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...

 from 1 January 1991 to 5 April 1999. Interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....

 on the TESSA was free from UK income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...

. 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
Clawbacks in economic development
In finance economics, a clawback is when an organization that is attempting to recover from a catastrophic shift and/or collapse attempts to essentially "tame" its past practices by giving its most highly-paid employees bonuses in pay that are deferred rather than bonuses that are able to be...

 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 Individual Savings Account
Individual Savings Account
An Individual Savings Account is a financial product available to residents in the United Kingdom. It is designed for the purpose of investment and savings with a favourable tax status. Money is contributed from after tax income and not subjected to income tax or capital gains tax within a holding...

s (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 ISA
Individual Savings Account
An Individual Savings Account is a financial product available to residents in the United Kingdom. It is designed for the purpose of investment and savings with a favourable tax status. Money is contributed from after tax income and not subjected to income tax or capital gains tax within a holding...

s.
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