On savings: Why ISAs are smart
Making contributions to an ISA has never been that simple and… smart. Following an overhaul of ISAs in 2014 the annual ISA allowance became more generous, allowing you to take advantage of great tax savings.
So what is an ISA, how much can I save or invest in it and what are the main advantages?
Firstly, what is an ISA?
An ISA (Individual Saving Account) is a saving account you never pay tax on.
In the year 2014-15, around 13 millions Adult ISA accounts were subscribed (£79 billion), with the share of accounts subscribed to in cash staying broadly static, at just under 80% of accounts. The estimated Exchequer cost of the tax relief for ISAs in 2014-15 was around £2.6 billion.
The allowance for this year is £15,240 in a cash ISA (for 2016/17 tax year) if you are 16 or older, and it is increasing to £20,000 for 2017/18.
What are the different types of ISAs?
- Cash ISA: for saving some money in cash, if you prefer to stay away from the financial markets;
- Stock and Shares ISA: for investing in shares, funds or bonds (corporate and government);
- Junior ISA: ideal for saving for your child under the age of 18 (Maximum contribution of £4,080 per year);
- Help to Buy ISA: saving for your first home;
- Innovative finance ISA: more risky new type of ISA allowing your to invest in alternative investments (such as peer-to-peer lending for example);
- Lifetime ISA: will launch in April 2017 to help savers beef up their savings towards a deposit for a first home or for retirement. The government will pay you a 25% bonus (up to £1,000) for every £4,000 saved per year.
- Or a mix of them!
For more check Money Saving Expert website.
Advantages of the ISAs
- Your money is accessible anytime (if held in Cash)
- The interest rate paid on the money placed in your Cash ISA is free from UK income tax
- Gains within your Stock and Shares ISA are free from CGT (“Capital Gain Tax”), great if you have a trading account and have already reached the £11,100 annual CGT allowance
- Set up is quick and easy
But risks to bear in mind
For most of the investments you would put into a Stocks and shares ISA, the value can go can go down as well as up and you may get back less than you invested.
The level of risk in your Stocks and shares ISA will depend on the investments you choose to put into it.