An ISA (Individual Savings Account) is a wrapper that goes around certain approved type of savings that allows the saver to earn income tax free. There is a limit on how much can be saved per year which for 2019/20 is £20,000 for an over 18 years old ISA account. An ISA is an excellent way to save and invest as you don’t pay income tax or capital gains tax on the income earned within the ISA which has the effect of allowing your investment to grow quicker as you get to keep all the money you make. In addition the government does not require any earnings from an ISA account to be declared on a tax return.
There are currently 4 different types of ISA for anyone 18 years old and over.
For under 18 year olds there is a Junior ISA. The saving allowances for 2019/20 is £4368. There are two types of ISA for under 18 year olds
The saving allowance for both over 18 and under 18 years old can be split between any of the ISA’s if you qualify to hold that type of ISA. As an example, if you are over 18 year old, you might hold an Innovative Finance ISA and a Stocks and Shares ISA so your £20,000 savings allowance could be split between both of those accounts. As long as you qualify under the criteria, you can hold all for ISA accounts.
There are different types of savings which can be included within the ISA Wrapper.
Cash ISA – this can include any money that you hold in a bank savings account; a building savings account; there are also some investments run through NS&I (National Savings and Investment) a government state owned savings bank which also qualify for Cash ISA.
Stocks & Shares ISA – the investments included in this type of ISA are shares in companies; unit trusts and investment funds; corporate bonds and government bonds. Not all of these types of investments will qualify to be included in an ISA. You will need to verify which ones can. If you are investing in shares, when looking at the overview page of the share, it will normally say simply “yes” or “no” that it can be included in a Stocks & Shares ISA.
Innovative Finance ISA – was set up to allow people who loaned money through Peer-to-Peer Lending – loans made to individuals and businesses through alternative platforms other than banks – to be able to offset taxes on the income they earn. It has now been expanded to included crowdfunding debentures. The debentures are investing in businesses through buying the debt that the business owns.
Lifetime ISA – this account was set up to help save towards your first home or retirement. You can add Cash or Stocks & Shares into this account between the age of 18-39. The limit is £4000 per year and the government will contribute a 25% bonus to the account, each year, up to a maximum of £1000 per year.
The money can only be withdrawn if you
a) want to buy your first home
b) you are aged 60 or over or
c) are terminally ill with less than 12 months to live. As the government adds the 25% bonus each year, if the money is withdrawn prior to the qualifying criteriWhy an ISA is your Best Friend for Investing?
above, they will charge a penalty so they can claw back the bonuses they have paid. With the Lifetime ISA there are rules about buying homes or transferring to the ISA to a different type of ISA. Whoever, your ISA is with, they will explain the rules.
Most people when they invest, are hoping to build their wealth. However, it is not the money they want, it is the lifestyle that the money can buy. With the UK Government ISA’s this is recognised as if you want a savings account that pays a bit more money that a traditional savings account then the Cash ISA provides for this. Many organisations try to make them fixed term savings but there a flexible Cash ISAs that will allow you to save for a specific reason and then withdraw your funds while enjoying the benefit of tax-free interest on the account.
Over the past decade or so, the government has been encouraging the UK population to take more responsibility for their finances and future needs such as retirement or home care. Providing flexible ISA’s that allow the investor freedom of choice in the way they invest their money while providing them with incentives such as bonuses, free from income tax and free from capital gains tax style investments helps to encourage the public towards financial independence.
The investment allowance is a per year allowance. If you can save the £20,000 allowed this year and again next year and the year after you can generate a lot of tax-free interest, dividends and capital growth in a short time. This allows the power of the compounding effect to be far more effective in a shorter period of time. By this I mean that if you earned say £100,000 in dividends and had to pay say 40% tax, the amount available for reinvesting would be £60,000. Through an ISA the £100,000 earned would remain tax-free meaning the full £100,000 could be reinvested back into the investment. The investment grows quicker.
An ISA is your best friend for any type of saving or investment as the tax-free income and capital gains along with the bonuses paid through the lifetime ISA can accelerate your investment goals. Helping you to achieve the lifestyle dreams much quicker. Anything that helps you achieve your dreams and goals has be good.
