An useful product provided by the government… read on to find out all about Individual Saving Accounts (aka ISAs).
What are ISAs
An ISA is simply a tax wrapper – which prevents you paying tax on the money sitting within your ISA products. In contrast, if you reach the tax threshold – you could be paying dividend tax and capital gains tax on investments made outside your ISA. They were introduced by the government in order to encourage people to save.
Every tax year (starts on 6th April) you are given a £20,000 ISA limit. This is the tax free amount that is currently in place, and has increased over the years since ISAs were introduced.
Different types of ISAs
There are currently 5 different types of ISAs available (do note, you may not be able to qualify for all of them).
You can split the £20,000 tax free allowance between any of these 5 types, or you can choose to put it all into one type – the choice is all yours. For example – you can put £16,000 into a Stocks and Shares ISA and £4,000 into a Lifetime ISA.
Do note – you can only pay into and open one of the each type of ISA aka you can not pay into multiple Cash ISAs during one tax year, or open two Stocks and Shares ISAs in one tax year.
Okay lets go through the 5 different types of ISAs:
Stocks and Shares ISA
You use a Stocks and Shares (S&S) ISA to invest into individual shares (companies), bonds or funds (group of individual shares).
The value of your S&S ISA could go up as well as down – so it is important to think long term when making decisions to invest your money. Generally, the longer you hold your investments, you should expect better returns. Check out this 5 step guide for tips to start investing.
The benefits of investing your money within an ISA, compared to a general investment account is that you will not face any Capital Gains Tax on your profits and you will also be exempt from Dividends Tax.
Cash ISAs allow to you save and not pay any interest on your income (Income Tax).
There are different types of Cash ISAs such as fixed rate, easy access and notice Cash ISAs. Be sure you know the level of access you will have to your money that you put into a Cash ISA, for example with fixed-term cash ISAs, you will only get your money back after a certain period of time that you signed for (you may be able to withdrawal earlier, but there may be a penalty). You will not lose any money put inside a cash ISA – as long as the rate is above the level of inflation.
Lifetime ISA (LISA)
A relatively new ISA, and unlike Cash and S&S ISAs, there is an annual deposit limit of £4,000. The government will provide a 25% bonus on any amount deposited, so if you manage to invest the full £4,000 you will receive £1,000 from the government.
You can chose to invest through your LISA, or have a Cash LISA.
The money can either go towards your first house deposit or used for retirement.
For more detail about LISAs – check this post out, which also provides qualifying requirements in order to open one. Be sure to read these requirements before opening a LISA – as you should ideally only put money away that you will touch again for a house deposit or retirement. You can withdrawal your money beforehand, but will lose the 25% government bonus.
Innovative Finance ISA (IFISA)
You are able to invest in businesses or other people, if they are looking for loans (also known as peer to peer lending) via an Innovative ISA (IFISA). Overtime you should get the maybe you leant back plus any interest added on. The amount you receive back depends on the length of time your money is held as well as the risk of your investment.
As with any type of investment – be sure you know exactly where your money is going and what you want from it.
Junior ISAs (JISA) allow you to invest for your child under the age of 18, the current annual limit is £9,000.
The parent or guardian of a child under 18 will have to open the JISA, and the child can not withdrawal the money until 18 – if they wish too. At age 16 the child can manage the account, and at 18 the account is automatically transferred into an ISA, unless they want to withdrawal the money.
Junior ISAs are available as both Cash and Stocks and Shares (investing) ISAs.
Benefits of ISAs
There are many benefits of using ISAs, instead of General Investment accounts, some benefits have been touched on throughout this post.
Notably, the main benefit of using ISAs is that they are tax efficient accounts – meaning you do not pay tax on the interest, gains (capital gains tax) or dividends received from within the ISA.
There are also many options for those setting up an ISA – making it easily accessible for new investors. For example, my Lifetime ISA is a fully managed invested portfolio, meaning I do not have to select the funds, bonds etc my money is invested it. Moreover, the differing types of Cash ISAs allows for maximum flexibility.