A Guide to ISAs

An ISA, or, and ‘Individual Savings Account’ is a tax-free savings or investment account that is available through commercial and private banks, insurers, asset managers, building societies and National Savings & Investments (NS&I) firms. Here we break down the difference between the different types of ISAs, such as Cash, Help to Buy, Lifetime, and Stocks & Shares.

 

Cash ISAs

Anyone in the UK aged 16 or over receives an ISA allowance at the beginning of each tax year, and as you never pay tax on their interest, a cash ISA is one of the most attractive of the options available. Simply put, cash ISAs are savings accounts that you never pay tax on. Specifically, for the 2018/19 financial year, the tax-free allowance is set at £20,000. A crucial difference between a cash ISA and a savings bank account is that the interest in the former doesn’t count towards your Personal Savings Allowance (PSA), enable you to earn it tax-free. Therefore, if you are in a higher tax bracket, or are simply saving large sums of money, these advantages  can amount to quite a sizeable sum. Typically, due to its PSA threshold, an alternate savings account will only award the average taxpayer £80 out of every £100 interest earned, whereas an ISA will provide the whole £100. Higher-rate taxpayers, over the PSA limit would typically receive £60 of £100 interest in a normal savings account. Top-rate taxpayers would only see £55 of their £100 interest earnings when cash ISAs do not deduct from said interest.

 

Flexible and Non-Flexible ISAs

ISAs can also be easy access (allowing you to withdraw money at any time) or fixed rate (offering a guaranteed rate, but withholding your funds for a set amount of time). For example, flexible cash ISAs allowing you to replace withdrawn cash without using up your annual ISA limit. Moreover, if you have £1000 in a flexible cash ISA, you can withdraw £500 and return it later without it affecting your ISA limit at all. Alternatively, with non-flexible ISAs, any withdrawals at all do not contribute to your annual limit. Therefore, any withdrawals from a non-flexible are going to reduce your annual limit whether or not you return your money to the account.

 

Help to Buy and Lifetime ISAs

Distinct from cash ISAs are the ‘Help to Buy’ and ‘Lifetime’ ISAs, designed to help individuals save for a new home or retirement. Launched in December 2015, the Help to Buy ISA is designed to supplement any savings put towards a new home with by additional 25%, up to a maximum of £3,000. However, it should be noted that you will be unable to contribute to both a Help to Buy and cash ISA in the same financial year. Alternatively, a Lifetime ISA (LISA), will provide the 25% bonus towards buying a first home or for retirement, though is limited to one per individual aged between 18 and 39. Notably, customers can save up to a maximum of £4,000 in a LISA, using their bonus to buy property to the value of £450,000, and unlike a Help to Buy account, you can open both a cash and LISA in the same tax year. However, LISAs come with one major disadvantage in that if you access the money for anything other than buying a first home or for retirement aged 60+ then you will be subject to a withdrawal penalty.

 

Stocks & Shares ISAs

As stated, everyone in the UK over the age of 18 has an annual £20,000 ISA allowance (from the 2018/19 tax year), and therefore have a range of options to consider. However, if the above ISAs aren’t suited to your requirements, then you may wish to consider a stocks & shares ISA. Although they are still called an ISA, they are very different to the cash ISAs listed above. Unlike cash ISAs, in which you never pay tax on, a stocks & shares account should be considered as a financial investment. Typically, larger investors, such as those putting money in corporate bonds, tend to max their allowance through stocks & shares ISAs. However, it is not uncommon for everyday bankers to invest in a stocks & shares ISA, and to do so from different providers, using a dedicated venture capital website (platform). Accordingly, when investing in a stocks & shares ISA, first you should decide which platform to use, and how to divvy up your funds, bearing in mind that some of the better investments may be more profitable, but also more expensive and charge a higher rate to use.