An ISA, or individual savings account, is a tool offered by the UK government to help people save more by being sheltered from tax: so any gains made can be realised without paying any tax on them. Neat, huh?
There are a number of different types, but all share this same property. The easiest way to think of them is like a wrapper — they don’t constitute a particular type of investment, but can be wrapped round one to protect it. What does this mean for you day to day? Well, you have £20,000 of ISA allowance each year, which means that you can shelter £20k of assets from future tax liability each year. That’s almost £1700 a month of savings. When combined with your capital gains allowance of £12,500 a year, and a potential company pension to maximise, you can save and invest a pretty sizeable chunk before thinking about paying any tax on it.
Let’s quickly run through the types of ISA you can take out:
- Cash ISA: the simplest, it’s essentially a standard savings account offered by almost all banks. This would be a good option for funds that you might need within a shorter time frame, and so wouldn’t want to expose to riskier investments. However, over the long term this probably wouldn’t be the best use of your savings due to the low interest rates you’ll undoubtedly be offered.
- Stocks & Shares ISA: this is now an investment, rather than savings product. Here you have the ability to make investments that will be free from tax for the entire time you keep them in your ISA — over 20,30,40 or more years, this can represent an enormous saving. Although this can generate returns far superior to the cash ISA, it’s important to note the additional risk. Unless you’re an advanced investor, it’s probably best to only use this over the long term and diversify accordingly across companies and countries. Index fund investing is a good way of doing this.
Also note that the fees are also higher than for a cash ISA. - Help to Buy ISA: as the name suggests, this is a cash ISA aimed at first time home buyers. It allows you to save £1,200 in the first month, and then £200 per month following that. This can continue until you decide to buy the house, at which point the government will contribute an additional 25% to your deposit up to a maximum of £3,000 added). A useful tool although there are some stipulations on what kind of house you can buy, so important to read the small print.
- Lifetime ISA (or LISA): this is very similar to the Help to Buy ISA in that it is designed to help home buyers (or those saving for retirement). You can save £4,000 per year, and get a 25% bonus from the government on the amount you save. However, there is a penalty for taking the money out for anything other than buying a home or retirement, so caution must be exercised here.
There is also a junior ISA designed for children under 16 years of age, with a £4,260 annual allowance. This is opened in the child’s name, although it is managed by the parent until they turn 16 to manage it, and 18 to withdraw it.
So there we are! Note that you can split your £20,000 annual allowance among the above, although it’s your responsibility to make sure that you don’t exceed the limit.
You must also do so before the end of the tax year (5 April) in order for it to count towards that year’s allowance. Unused allowance does not get carried over. You can transfer ISAs without withdrawing any of the assets — to do so, simply ask your new provider for an ISA transfer form, although note that this can often incur a fee.
We’d recommend long term investors focus predominantly on a stocks and shares ISA, which can also be managed directly on the Strabo platform. We provide information on your risk profile, allow you to set investment goals, track your allowances and more. You can reach us here for details and signup.
Is there anything we’ve missed? We’d love to hear from you, and how you manage your ISA.
