An Individual Savings Account or ISA provides a tax efficient alternative to savings and investments. Any gains which are made from an ISA, whether they be interest from savings or returns on an investment, are free from tax. Of course, this is an attractive alternative to a standard savings account, particularly for those with a higher tax burden. However, it’s worth noting that not everyone will benefit from investing within an ISA. Before deciding if an ISA is right for you, let’s look at the fine print.
What is an ISA?
An Individual Savings Account provides a tax-free return on savings and investments. Everyone over the age of 16 is entitled to an ISA allowance, which renews at the beginning of each tax year. This allowances changes year-to-year but is currently set at £20,000. This means that you can invest up to £20,000 into ISA accounts, during each tax year.
It’s important to note that there are multiple types of ISA’s, and you can invest across different types of accounts, as long as the total amount falls within your £20,000 allowance. Alternatively, you can use all of your allowance in a single ISA, it’s up to you.
With this in mind, what are the different types of ISA and what do they have to offer?
Cash ISA
The most common type of ISA and the one you’re most likely to hear about is a cash ISA. This is basically the same as a standard savings account but with tax-free interest. Whilst standard savings accounts often provide a higher interest rate compared with cash ISAs, there are instances in which choosing an ISA is preferable. For example, if your interest from your savings account is affecting your taxes or if your savings are locked up for a period of time. Although, it’s worth noting that some cash ISAs (fixed rate) also require you to lock away your savings before you can withdraw them.
Stocks and Shares ISA
As the name suggests, a stocks and shares ISA allows you to invest, whilst also protecting potential gains from tax. This can offer an attractive alternative to standard investment, which is subject to tax. However, the same £20,000 allowance applies, which puts a cap on how much you could potentially earn from this type of investment. Also, you’ll normally pay a fee in order to use this type of account, whether that’s to an account manager or if you opt to make the investments yourself, to the provider. Of course, any investment in stocks and shares, even an ISA, comes with a greater degree of risk. Yes, the potential gains are greater but so is the potential for losing your investment.
Innovative Finance ISA
Innovative finance ISAs or IFISAs offer a modern approach to money lending. Rather than borrowing from a bank or building society, IFISAs create a peer-to-peer network, providing a lifeline for those who can’t access traditional credit. Again, you can see a return on these investments, with anything within your £20,000 allowance being tax free. However, just as with the stocks and shares ISAs, there are risks involved. This type of lending doesn’t benefit from the same types of protection applied to traditional loans. Therefore, there is always a risk you could lose money.
Lifetime ISA
Whilst some ISAs come with a level of inherent risk, others offer a greater degree of stability, such as a lifetime ISA. Lifetime ISAs are a government-backed scheme, created in the hope of helping people to save- whether that be for a home or for retirement. Anyone between the ages of 18-39 can open a lifetime ISA and you can save up to £4,000 per year, which will reduce your overall £20,000 allowance. The great thing about this type of ISA is that the government will pay a 25% bonus on the money that you save, maxing out at £1,000 per year.
Money can only be withdrawn from a lifetime ISA, either for the purchase of your first property or after the age of 60, to help with retirement.
With so many different types of ISA available, there is something for everyone. However, if you’re looking for expert help in order to ensure you make the right decision, the team at Salhan Accountants offer comprehensive financial solutions.
