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What is an ISA?

What is an ISA?

An ISA (Individual Savings Account) is a tax-efficient savings and investment account available to UK residents.

As it's tax efficient, you don't have to pay any tax to the government on the money that you make within your ISA. ISAs are designed to encourage people to save money by offering tax benefits on the income earned on their savings.

You can use an ISA to save up for something special, or you can use it to help your money grow over time.

What types of ISA are available?

There are currently several types of ISA available to open. These are:

  • Cash ISAs;
  • Stocks and shares ISAs;
  • Innovative finance ISAs,
  • Lifetime ISAs.

To be allowed to open an ISA, you must be:

  • 16 or over for a Cash ISA;
  • 18 or over for a Stocks and shares or Innovative finance ISA,
  • 18 or over but under 40 for a Lifetime ISA.

You must also be either:

  • resident in the UK,
  • a Crown servant (for example diplomatic or overseas civil service) or their spouse or civil partner if you do not live in the UK.

In addition a Junior ISA is available for those aged under 18.

How much can I put in an ISA?

You have what is known as an ISA allowance each tax year. For the 2023/24 tax year this allowance is £20,000.

The allowance for a Junior ISA is different with you only being allowed to save £9,000 for the 2023/24 tax year.

Piggy bank wearing glasses next to a calculator

Why might I want to save or invest in to an ISA?

Some key features of ISAs include:

  • Tax efficient savings: Interest earned on Cash ISAs and profits made on Stocks and shares ISAs are tax efficient. This means you don't have to pay Income Tax or Capital Gains Tax on the money you make from an ISA.
  • Annual ISA allowance: UK residents have an annual ISA allowance, which is the maximum amount of money that can be saved or invested in an ISA each tax year.
  • Flexibility: ISAs can be used for a variety of purposes, such as saving for a rainy day, saving for a specific goal (such as buying a house), or investing for the long term.
  • Access to funds: Depending on the type of ISA you choose, you may have access to your money at any time or you may have to wait until a certain date.

ISAs can be a good option for anyone looking to save or invest money in a tax-efficient way. It's important to carefully consider your options and choose an ISA that is suitable for your needs and goals.

How do the different types of ISA work?

  • Cash ISAs are incredible simple in that they are normal Bank or Building Society savings accounts. To deposit money into a Cash ISA, you can either transfer money from a current or savings account, or make regular payments through standing order. The interest rate received will vary from provider to provider.
  • Stocks and Shares ISAs are risk based investments where you can buy and sell stocks, shares, and other securities without paying tax on any capital gains or dividends. Providers typically offer a range of funds to invest in. Your return will depend on how your investment performs and there are likely to be charges that will be deducted for managing your ISA. This type of investment should only be considered if you are able to leave monies invested for at least 5 years and have other monies to fall back on in the event of an emergency.
  • Innovative Finance ISAs are a peer-to-peer (P2P) lending account where you can lend money to businesses or individuals and earn tax efficient interest on your loans. To lend money through an Innovative Finance ISA, you first need to open an account with a P2P platform. You can then choose which loans you want to lend money to, based on the borrower's creditworthiness and the interest rate offered. You can also set up automatic investments through the platform, so that your money is invested in a diversified portfolio of loans. The risks associated with lending money through an Innovative Finance ISA depend on the creditworthiness of the borrowers and the P2P platform you choose. It's important to research the platform and diversify your investments to reduce the risk of default. Again, you need to be in a financial position to be able take a risk with your money if considering this type of ISA.
  • Lifetime ISAs are savings accounts for first-time home buyers or those saving for retirement, where you can earn a government bonus on your contributions. To open a Lifetime ISA, you need to be aged 18 to 39. You can only open one Lifetime ISA each tax year, and you can contribute up to £4,000 per year until you turn 50. The government will then add a 25% bonus to your contributions, up to a maximum of £1,000 per year. The £4,000 forms part of your overall ISA allowance giving you the option to save a further £16,000 in a different type of ISA. To use your Lifetime ISA to buy your first home, the property must be in the UK, have a value of up to £450,000, and be used as your main residence. You can withdraw money from your Lifetime ISA to use as a deposit on a property, and the government bonus will be paid directly to your conveyancer. If you don't use your Lifetime ISA to buy a home, you can continue to save and earn the government bonus until you turn 60, at which point you can use the money to fund your retirement. You can withdraw the money from your Lifetime ISA at any time, although you will lose the government bonus and may have to pay a significant withdrawal charge if you do so before you turn 60.
  • Junior ISAs are savings account for children under the age of 18, where parents and guardians can save money on behalf of their children tax efficiently. You can only open one Junior ISA for each child, and you can contribute up to £9,000 per tax year. The child becomes the owner of the ISA when they turn 18 and can then access the money and use it as they see fit. There are two types of Junior ISAs: a Cash ISA and a Stocks and Shares ISA. A Cash ISA is a savings account where you can earn tax efficient interest on your deposits, while a Stocks and Shares ISA is an investment account where you can buy and sell stocks, shares, and other securities without paying tax on any capital gains or dividends.

Women looking at laptop

How do I know which ISA is right for me?

ISAs can be a good way to save or invest your money, but it's important to pick the one that is most suitable for you. Things to think about when making a decision include;

  • What are you saving for? This will help you to determine how long it will be before you need access to the money.
  • What is your attitude to risk? Different ISAs offer different levels of risk and potential return. For example, a Cash ISA is generally a low-risk option, while a Stocks and Shares ISA carries more risk but has the potential for higher returns.
  • How much flexibility do you need with your ISA? Some ISAs, such as a Cash ISA, allow you to withdraw money at any time without penalty. Others, such as a Lifetime ISA, may charge a withdrawal fee if you take money out before a certain age.
  • What fees are associated with the ISA? Some ISAs charge annual fees, transfer fees, or withdrawal fees, which can eat into your returns. Make sure to compare the fees of different ISAs before making a decision.

It could be beneficial to speak to an expert you trust to help you make the best decision. A financial health check is your opportunity to have us check over your finances and talk to you about what you are trying to achieve. From here we can recommend what we think your next step should be.

If you'd like to know more about how we've helped other people with saving and investing, you can read our testimonials and client case studies.

For more help and advice or to receive a complimentary guide covering wealth management, retirement planning or Inheritance Tax planning, contact Yorkshire Financial Planning on 01482 275540 or complete our contact form.

The value of an ISA with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested. An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.

The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.

Innovative Finance ISAs, Cash ISAs and Lifetime ISAs are not available through St. James's Place.

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