Intro
We all learn sooner or later in life that if we want to buy our first home, have a comfortable retirement, or give our children’s financial security a head start, we have to start saving money.
The sooner we start putting money aside, the better. Nevertheless, saving money can seem complicated, burdensome and something we tend to put off. Finding the right kind of investment for your needs, means and financial profile can feel overwhelming. The UK offers its residents a savings program that is an accessible solution, called an Individual Savings Account (ISA). It comes with an almost irresistible extra benefit: it is tax-free. ISAs are a good starting point for building up your savings.
ISAs are basically tax-free savings accounts, and there are four types:
You can build up your savings in one or more of these types, but there are limits to how much you can invest.
What is the investment limit?
There is a limit to how much you can put into your tax-free ISA package. In the 2021/2022 tax year, you can save up to £20,000 – this is called an annual allowance. You can invest all of it in one type of account or spread the allowance across some or all of the ISA types.
Bear in mind that you can only put £4,000 into the Lifetime ISA each year, so you will have to invest the remaining £16,000 allowance in other ISA types.
The Junior ISA allowance limit, designed to give children under 18 a head start, is £9,000 annually. Only two types are available for Juniors, a cash ISA or a stocks and shares ISA (you can open one or both).
Pay attention to the fact that any unused allowance does not roll over to the next year, so if you don’t use it, you will lose it and its benefits forever.
What are the tax benefits?
ISAs keep the taxman away: they are not subject to income tax, and dividends, interests, bonuses and capital gains are not taxed. You don’t even need to declare the ISAs on your annual tax returns. The ISAs will not close at the end of the tax year; you can keep your savings tax-free for as long as you keep the money in your ISA account.
Can I easily access my money?
Another advantage of ISAs is the generally easy access to your piggy bank, but you have to make sure you choose a flexible ISA to maximize your options.
Many providers offer flexible ISAs, but you will have to make sure your account manager offers this option. Under a flexible ISA you can take out cash and then put it back during the same tax year without reducing your current year’s allowance.
The maximum you can invest for the 2021/22 tax year is £20,000. Let’s say you have an emergency and you need to access your funds and take out £5,000 from your cash ISA. If you put the £5,000 back in the same tax year you will still have the full £20,000 allowance to take advantage of, it will not be deducted from your total.
Some cash ISAs have fixed terms, which offer you better interest rates in exchange for keeping your money for a set period of time. If you opted for a fixed term ISA, you might have to pay a penalty if you break the sum before the term ends.
Providers offer different interest rates and conditions for fixed term ISAs, so it is worth comparing different options to find the one that best fits your needs. Fixed-rate ISAs are a good choice for putting aside money you know you won’t need during the term.
You should bear in mind that you can access your Lifetime ISA when you turn 60 or when you are buying your first home, otherwise you will have to pay a withdrawal fee.
Can I open an ISA?
You have to be over 16 to open a cash ISA, and at least 18 to have a stocks and shares or an innovative finance ISA. People between 18 and 40 can open Lifetime ISAs. You must also be a resident in the UK, or a Crown servant, meaning part of the diplomatic or civil services overseas, or their spouse or civil partner.
Are ISAs secure?
Savings protection applies to ISAs as well, meaning that the UK's Financial Services Compensation Scheme (FSCS) covers up to £85,000 of your ISA savings if held at a bank or provider that is under the supervision of the UK regulator.
Further reading
- Everything you wanted to know about ISAs
- What is an ISA allowance?
- What is an ISA: an in-depth guide to tax-advantaged savings for UK residents
- How much can you put in an ISA?
- How many ISAs can I have?
- What is a stocks and shares ISA?
- What is a Lifetime ISA and how best to use it?
- How to open a Lifetime ISA
- What is a cash ISA?
- What is a Junior ISA?
- What is a flexible ISA?
- What is an Innovative Finance ISA?
- How to transfer your ISA?
- How does an ISA work?
- Which is the better investment: pension or ISA?
- Is ISA only for UK citizens?
- What is the safest ISA?
- What happens to my ISA if I move abroad?
- Does an ISA beat inflation?
- Interest on cash ISA: much do they pay?
- IBKR offers global access with local benefits for ISA holders
