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ISAs: Understanding the basics

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ISA season is almost upon us, so we’re taking things back to basics for people who might not be familiar with what ISAs are and how they can help you save. This blog will help you understand the different types of ISAs and their benefits. 

What is an ISA?

An ISA (individual savings account), lets you save tax-free into a cash savings or investment account. We all have an annual ISA allowance that/which we can choose to use – or lose – and cannot carry over to subsequent tax years. There are five types of adult ISAs, each with the benefit of being tax-free but also with distinct, unique features.

What are the benefits? 

You can take advantage of many tax benefits when saving or investing with an ISA. Some of these include no capital gains tax on capital growth, nor any tax on income received, either as interest or dividends, from the investment or cash savings. You also don’t need to declare ISAs on your tax return.

There are also tax-free allowances for interest earned on savings and from company dividends in investments held outside the ISA wrapper, but they are limited, and tax must be paid on amounts above the allowance limit.

What is my annual allowance?

Your annual allowance for ISAs is set by the government – not your ISA provider. For this tax year, the maximum amount you can protect is £20,000.

Typically, a saver can only pay into one ISA product per year with one provider, although some providers have started to offer a ‘portfolio’ product that allows you to put money across a number of ISA accounts offered by that specific provider.

There is also a minimum amount you can put in an ISA, which depends on which ISA you open and who with.

What are the rules?

The rules are simply: You must be at least 16-years-old to open an ISA, although providers may have their own minimum age requirements. You can keep previous years' ISAs open, transfer them to new providers and change the investments you hold in them. There are extra rules for Help-to-Buy and Lifetime ISAs.

Before April 2016, you could take money out of an ISA at any time, but you would lose that part of your allowance. However, since April 2016 the rules became more flexible and some ISAs will allow you to take out and pay back money within a tax year. Providers aren’t obliged to offer this flexibility on their accounts, so check the rules and accounts terms very carefully.

What types of ISA are there?

There are five different types of ISA: cash, stocks & shares, innovative finance, lifetime, and junior.

Cash ISA

Anyone over the age of 16 can put their cash savings into a Cash ISA. Cash ISAs can be instant access, have notice periods or be fixed. The annual allowance for a Cash ISA is currently £20,000.

Stocks & Shares ISA

Anyone over the age of 18 can put individual shares or managed funds into a Stocks & Shares ISA. The annual allowance for a Stocks & Shares ISA is currently £20,000.

Innovative Finance ISA

Innovative Finance ISAs are for investments in peer-to-peer lending platforms. You must be over the age of 18 to invest. The annual allowance for an Innovative Finance ISA is currently £20,000. Innovative Finance ISAs does not qualify for the savings element of the Financial Services Compensation Scheme (FSCS) that protects money up to £85,000. Nor does it enjoy the FSCS investing element that covers up to £50,000.

Lifetime ISA

The Lifetime ISA is designed to help investors between the ages of 18 and 39 save for either a first house purchase or their retirement. Once you have a Lifetime ISA you can continue to contribute until the age of 50. You can save or invest up to £4,000 per tax year into a Lifetime ISA and the government will pay a bonus of 25% on any money saved. The proceeds can be used to purchase a property worth up to £450,000 or can be penalty free after the age of 60.

Junior ISA

Junior ISAs can be opened on behalf of children under the age of 18. Anyone can invest in the Junior ISA – parents, grandparents or friends. The money belongs to the child and they can access it when they reach 18 years of age. The Junior ISA currently has an annual allowance of £4,368.

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