ISA’s

ISA’s, or Individual Savings Accounts, have been available since 1999 and provide a tax efficient way to save by shielding your money from any further Income Tax (the tax on any sources of income you may have) or Capital Gains Tax (the tax on any profit made when you sell an asset).  

Despite the many benefits that ISAs provide, there is a restriction on the amount you can save / invest called the Annual ISA Allowance. This is set at £20,000 per year (correct for the 2021/2022 tax year). This means that you can top up your ISA at any point during the year so long as the total amount saved or invested does not exceed £20,000 in that tax year.

This limit of £20,000 maximum is also regardless of any withdrawals made during the year. For example, if you save £10,000 in a given tax year and then withdraw £5,000, you are still only able to add an additional £10,000 to your ISA in that tax year despite the withdrawal. The allowance is reset on 6th April every year and you are then able to save an additional £20,000 in that following tax year and in every tax year after that. You cannot carry forward any unused ISA allowance to future tax years so it’s important to utilise your allowance on or before 5th April each year.

For this reason, it’s worth considering whether or not any money needed can be taken from a different savings account before withdrawing from your ISA.

There are different types of ISA and the three most common are:

This is available to anyone over the age of 16 and is similar to a bank or building society account. The difference is that, with a cash ISA, any interest that you earn on your savings will be tax-free.

There are different Cash ISAs available from different providers so it’s important to understand what is on offer. With many, you can earn a variable rate of interest and have instant access to your money should you need it. Some offer a fixed rate of interest for specified time period but often have penalties and/or delays if you want to access your money early.

This type of ISA is available to anyone who is 18 or older. It allows you to invest your money in a variety of ways across different markets and so increases your potential to grow your money and increases your returns when compared with a cash ISA. However, it comes with a greater level of risk as your investment can go down as well as up in value.

The ISA wrapper around your investments makes sure that your income and your growth is all achieved tax-free and so maximises the return that you are able to generate from your investment. This is attractive where you don’t need the money invested in the short-term and is particularly beneficial where cash ISAs aren’t keeping up with inflation. Where this is the case, your spending power is being reduced day by day which can be highly detrimental to your long-term plans.

As both the costs you pay to the provider and the investment decisions you make can all impact the return that you see, it’s important to make these decisions after seeking advice from a qualified and trusted adviser.

This is aimed at helping younger people to save for their first home and/or for their retirement and later life. It is therefore open to people aged between 18-40 and contributions can be made up until your 50th birthday.

The investments held within the ISA wrapper can be stocks and shares, cash or a mix of both. The limit however is £4,000 per year and this amount goes towards your total ISA annual allowance of £20,000 per year. The main benefit of this type of ISA for savers is that the government will add a 25% bonus to the amount you save (up to a maximum bonus of £1,000 per year).

If you don’t use all or any of your LISA for a deposit on a first home, you can withdraw your savings plus your bonus after the age of 60, which is why it is also a useful tool for your retirement. However, if you access the money for any other reason, you must pay a 25% penalty. This penalty not only wipes out the bonus but will reduce your capital too.

For example, if you save £1,000 and earn a 25% bonus, your savings will now be £1,250. However, a 25% penalty on £1,250 (for instance when accessing the money early and not for a deposit on your first home) will bring it down to £937. This demonstrates the importance of only using your LISA for the purpose for which it was meant and the value of seeking expert financial advice when designing your financial plan

If you are interested in how these or the other types of ISA available may fit into your financial plans, please get in touch so that one of our advisers can provide further guidance and help create the most effective financial plan for you based on your needs.

The Financial Conduct Authority do not regulate tax planning.