Heard about ISAs? What are they and which one do you choose? Find out more here.
An Individual Savings Account (ISA) is a bit of a tax-free basket for your savings. You can put different eggs inside your basket (the eggs being different types of savings or investments) and the whole basket will benefit from tax-free growth. However, there is of course a limit to the dream.
Currently, the ISA allowance is £20,000 per year (2018/19), all of which you choose from cash, stocks and shares. Importantly, the interest is tax free in the cash ISA, enabling you to really benefit from the money you set aside into your ISA whereas a Stocks and Shares ISA has tax benefits.
What are the benefits of a cash ISA?
- There are a range of ISA products designed to meet different needs, which is useful if you have a particular goal in mind
- Instant access — great if you need to be able to get to your money quickly
- Fixed rate — good if you have a lump sum to save
- Some ISAs do not expire when the tax year does, so your money will continue earning you tax free interest as long as you’ve got the ISA
- Anyone aged 16 and over can open one and a resident in the UK
What are the tax benefits of a Stocks and shares ISA?
- No personal liability to capital gains tax on any growth
- No tax to pay on any dividend distributions. No further tax on interest distributions
- Depending on who is issues the ISA they can reclaim 20% tax that was deducted on the interest distributions to you
All of the above information is based upon our current understanding of HMRC tax rules and is subject to change. Please ensure you refer to gov.uk for further information.
Stocks and shares ISA enables account holders to invest £20,000*into different products, such as funds, shares, corporate and government bonds and various other types, as long as you are over the age of 18 and. a UK resident. The returns you make when you sell off any of the investments inside your ISA basket are free from capital gains tax, which is particularly appealing for those investing with a smaller amount.
Although you typically have the chance to get back much higher returns with your stocks and shares ISA than with a cash ISA, there are higher risks to your capital and various fee differences which need to be considered.
Therefore, whichever bank or investment firm you decide to open an ISA with, you need to carefully consider the different options that are in the market and choose the one that is right for you and your financial goals.
*Correct at the time of publishing
It is always important to understand what you are investing your money into and we encourage everyone to build upon their financial knowledge. Read our other 101 guides and financial tips in our publication.
