Your money-making expert. Financial journalist, TV and radio personality.
ISAs are basically a way to save or invest money that is tax-free. They may seem confusing as there are different types of ISAs and each ISA has different rules, but in this ‘all you need to know’ guide to ISAs we explain what they are and what the rules mean.
ISAs (Individual Savings Accounts) were introduced as a way to encourage residents of the UK to save money and invest in their future.
There are five main ISAs currently available on the market. Each has different benefits and disadvantages, allowances and rules.
However, all five types of ISA have one overall advantage – they are all tax efficient. This means you do not pay tax on any capital gains, or any interest you earn.
The current allowance for this tax year (2022-23) is £20,000 for adult ISAs and the IFISA. The Lifetime ISA as a limit of £4000. (Don’t worry, we explain the differences below.)
One of the most important rules that applies to all ISAs is that you need to save or invest before the end of the tax year – 5th April.
It’s also important to remember that your allowance does not roll over into the next financial year – ‘use it or lose it’ is the ISA mantra!
Yes (and no). You can split your allowance of £20,000 between different types of ISA but you can’t open two of the same sort of ISA in the same tax year. However, once the new tax year begins (6th April) you can start again with a new ISA and your allowance resets to £20,000.
You can take your money out of an ISA whenever you want without losing any tax benefits. But again it’s really important that you check the terms of your ISA to see if there are any rules or charges for making withdrawals.
A Cash ISA is the ISA most similar to your traditional, run of the mill savings account. You have to be 16 years old to open a Cash ISA. It is a way to save money and earn interest on your savings.
As with traditional savings accounts, many see Cash ISAs as a way to keep their savings safe from the uncertainties of the financial market. However, Cash ISAs are not always the best option for keeping your money at it’s best rate. If inflation rates exceed the interest rates on your Cash ISA – which in the current climate means they are likely to – the money in your Cash ISA may actually lose value in real terms. This is definitely something to consider before opening a Cash ISA.
A benefit of Cash ISAs is that there is no tax to be paid on any interest you earn. When you have a savings account with a bank, it is common practice to charge you income tax on any savings you have over £1,000.
Sometimes referred to as an Investment ISA, the Stocks and Shares ISA invests your money. As the name suggests, your money will be invested into stocks and shares, as well as bonds, property and funds, to name a few.
As with the Lifetime ISA, you don’t have to pay any tax on the money you earn, whether it be capital gains, interest or dividends. After any fees are taken, you keep everything you earn from your investments. Result!
To open a stocks and shares ISA and start paying into it, you must be aged 18 or over and be a resident in the UK. As with all ISAs, there is an allowance on how much you can put into your ISA. The allowance for the 2022/23 tax year is a maximum of £20,000.
Yes, that’s right – you can put £20,000 in there – and keep all your interest, capital returns and dividends you receive – tax free!
It is important to remember, that although they are named as a type of Individual SAVINGS account, it is in fact not a type of savings, but instead an investment. Stocks and Shares ISAs do not come without risk and returns are not always guaranteed. Your capital is at risk, and you may lose money as well as gaining it.
However, overtime, there is a chance your investment will grow. Compound interest adds to the total in your Stocks and Shares ISA. Your investment may go down as well as up, and the higher the risk, the increased likelihood of a higher reward.
It is possible to transfer your Stocks and Shares ISA – but please read our article on how to do this before you make any decisions and – this is important – don’t EVER withdraw the funds to reinvest, transfer them instead. Click here to find out why and how.
Junior ISAs (JISAs) are an amazing way to give your children the best possible start to their adult life. The earlier you open it, the more savings they will have when they turn 18 years old. So, how do JISAs work?
Junior ISAs were launched just over a decade ago, in 2011. The Government launched them as a replacement for Child Trust Funds, and they let you save and invest for your child or children’s futures. You cannot open a JISA if you already pay into a Child Trust Fund, however. If you would like to, you can move any funds in your Child Trust Fund into a JISA. Once the transfer is complete, the Child Trust Fund will be permanently closed.
As with every type of ISA, there are a few rules when opening one, the main ones being they are for children under 18, and they must be a resident in the UK. They also have an annual allowance, which dictates how much you can put into a JISA per year. The limit for the 2022/23 tax year is £9,000 per annum.
Not only are they perfect for giving your youngster a foot in the door, but they come with a huge bonus – they are tax-efficient, so you do not get taxed on any capital gains or interest. That’s right – you could save for your little one for 18 years, and you get to keep every single penny of interest that you gain in that time.
There are two types of JISA to choose from – a Junior Stocks and Shares ISA and a Junior Cash ISA. You can pay into one or the other, or even both. The choice is entirely your own. However, it is important to remember the JISA itself is not your own. It belongs solely to your child and no one else. When they turn 18 years old, they can access their JISA.
If your child wants to continue saving as an adult and they do not withdraw any money from this, it will become an adult ISA. This will help them continue to build their financial future. Plus, it is a tax-efficient way to do so!
Perhaps one of the most widely spoken about ISAs is the Lifetime ISA, commonly referred to as the LISA. The LISA allows you to save to buy your first-home or for retirement. The best part is, you receive a 25% bonus from the Government on anything you put into your LISA, up to £1,000 per tax year.
So, if you put £4 into your LISA, you will receive a 25% top-up of £1 from the Government, bringing your total up to £5. The same goes if you put £4,000 annually into your LISA, you will receive a bonus of £1,000 from the Government, bringing your total to £5,000. This bonus is paid into your LISA every calendar month.
You may have opened a Help To Buy ISA before November of 2019. If you did, you can continue paying into this and receive your benefits. If you missed out on the scheme before it ended and want some extra help saving for your first home, then a LISA may be the best way forward for you. Keep in mind, however, the home you want to buy must cost £450,000 or less if you want to use the money from your LISA.
Another benefit of the LISA is that you don’t have to pay any tax on income you receive, or any capital gains. You can also hold cash, investments, or a mixture of both. It’s entirely your choice. It’s no wonder the LISA is one of the most popular types of ISA on the market at the moment.
There are a few rules which come along with a LISA. You must be between the ages of 18 and 39 to open a LISA, however you can put money into your LISA until your 50th birthday. When it comes to buying a house with the funds in your LISA, you must be a first-time buyer, and you must have your LISA open for at least 12 months before you can use it towards a deposit for your first house.
If you don’t want to use your LISA to buy a house, you are not able to access your money until you turn 60 years old. In some circumstances, such as terminal illness, you may be able to access your funds before this. If you do choose to withdraw some money before you turn 60, however, you will be charged 25% of the amount you take out.
Last on our list, but most certainly not least, is the Innovative Finance ISA (IFISA). IFISAs are essentially a way for you to become a lender. This means your ISA will help to provide loans to approved businesses and individuals through peer-to-peer lending.
You will receive a fixed amount of interest in return, over a set period of time. Plus, you will pay no tax on the interest and capital you may gain from this lending. Thus, if you lend to an up-and-coming business that turns into something profitable, you could be looking at some serious returns on your lending.
As with all investments and lending, there are risks which are associated with them. Without a bank acting as the middleman, there are greater opportunities for both the lenders and borrowers. There are also greater risks. For example, borrowers may default and fail to return your money. However, with greater risk comes greater reward. Ultimately, it is entirely your own choice what you choose to do with your money.
It is also important to keep in mind that your capital is at risk when opening an IFISA. Similarly, in the event of a borrower failing to return your money, you would be unable to receive financial compensation. This is due to your money not being protected by the Financial Services Compensation Scheme (FSCS).
Stocks and Shares ISAs offer an easy way to invest and grow your money over time and in my opinion are a far (far) better option than Cash ISAs.
Don’t be put off by the risk of investing in funds. The long-term returns you get are far more likely to outrank the paltry interest rate you’re getting on your savings (which are even lower when you take inflation into account).
We all get scared of losing our hard-earned money. But you can make your money work hard for you, so that it grows and leaves you with a lovely savings pot for the future!
If you are a confident and experienced investor, why not explore self-select ISAs?
A self-select ISA is a type of stocks and shares ISA. This means that instead of putting your money into a cash account, earning interest, you can earn returns from the stock market.
The difference between a standard stocks and shares ISA and a self-select ISA is that you pick and buy the underlying investments yourself, instead of relying on a fund manager.
So, you can back individual shares, giving you complete control over your investments, whilst still benefiting from the tax-free status.
For more information on how to invest in a self select ISA, click here.
*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.