ISAs are tax free cash and investment savings accounts for UK residents. If you're aged 16 or over then you're eligible to open a cash ISA, and people aged 18 or over can open a stocks & shares ISA or innovative finance ISA.

 

Each tax year UK residents get an ISA allowance, which is the maximum annual amount that you can save in tax free cash and investment ISAs. The total amount individuals can save each year is £15,240, with the limit set to rise to £20,000 for next Financial year, which starts on 6 April 2017. Savings which remain in an ISA year-on-year will continue to reap tax-free benefits until withdrawn from the account.

 

Introduced in 1999 as a way to encourage more saving by offering a tax-free alternative to paying interest on savings accounts or capital gains on shares, ISAs were immediately popular.

 

Originally, the options were: cash, or stocks and shares. Lately, the range has developed into a kind of smorgasbord of ISA options: help-to-buy ISAs for aspiring homeowners, innovative finance ISAs for peer-to-peer lenders and from April, lifetime ISAs, which can be used either to help fund retirement or buy a first home.

 

From April 6, the limit on any type or combination of ISA types is £20,000 per tax year. Some types of ISA have individual maximum annual limits.

 

Should you put your money in an ISA? Well, it depends on what you want it for and the term.

 

Now there is a personal tax-free allowance on interest of £1,000 on all savings, not just ISAs, the cash ISA no longer has any advantage over a regular savings account for most people.

 

Here’s a rundown of the options:

 

Cash ISA
The most popular type of ISA with the British public, because they are held in deposits, just like normal savings accounts, and they are the least risky, with deposits up to £85,000 covered by the Financial Services Compensation Scheme. However, rates on these are currently low because interest rates are low and because of the personal allowance, they are no longer more attractive than normal savings accounts. You can invest up to the whole £20,000 limit in cash if you wish.

 

Stocks and shares ISAs 

These allow investors to buy shares, funds, ETFs, investment trusts and corporate or government bonds and to hold them without paying any tax on capital gains or income tax on any dividend payouts. You can invest up to the whole £20,000 limit in stocks and shares. You can only invest in one stocks and shares ISA in the tax year.

 

Innovative Finance ISAs
Introduced in 2016, these allow investors to lend to businesses or projects via a regulated peer-to-peer lending platform. You can invest up to the full £20,000 in an IFISA if you wish. You can only invest your IFISA in one platform per year.

 

Junior ISAs
In your child or children’s name, although they can’t access the money until they are 18. Up to £4,080 in the tax year can be invested in one of these per child. When they are 18, the money is theirs and they can decide what to do with it. If you are worried that means it could be wasted, you could use your own ISA allowance to save for your children instead.

 

Help-to-buy ISAs
Cash ISAs for specific purpose of buying your first home, savers also get a government top-up of 25% on what they contribute to one of these. There’s a maximum annual contribution limit of £2,400 (£3,400 in the first year), and a total limit of £12,000, and you can’t invest in one of these and a lifetime ISA. Help-to-buy ISAs can only be held in cash, which means you are restricted to fairly low interest rates.

 

Lifetime ISAs
The newest ISA in the range, lifetime ISAs are designed to either help people onto the ladder or to supplement retirement savings. Like the help to buy ISA, it comes with a government top-up of 25%. Unlike the help to buy ISA, you can invest these in stocks and shares as well as cash. The maximum annual investment is £4,000. There are lots of conditions attached, such as you have to be under 40 when they are launched and the top-up is only paid up to age 50. And if you want to get the government bonus, you cannot make withdrawals.

 

It might be difficult to choose, but there is an option for everyone, as long as you have enough to put aside as little as £50 a month (a standard minimum investment amount on most platforms) and you know what you are saving for.

 

Would you like to work out how much money you could save for now and the future?

Use our quick and easy savings tool and get your budgeting plan. 

1. Find out how much you could save for the future

Essential costs are things like rent/mortgage, utility bills, train fares and childcare. These are your fixed costs.

2. What your future savings could look like

These calculations do not include the interest your savings will earn you over time. Any pay rises or promotions will also help you increase your savings potential, as well as any opportunities to make extra money or reduce bills.

3. Your future savings budget breakdown*

4. Working out how to budget and save each month

The key to achieving your savings goals is to clear any debt first and then to save regularly!

Get into a savings habit and whatever you can afford to put away each month will soon add up over time. Your future self will thank you for it.

And remember FSCS protects your savings for free, from as little as £1 up to £85,000. Check your savings provider is FSCS protected.

FSCS protected

What is Money Means? 

Money Means is a news and information series written by independent financial and consumer journalists and experts*. FSCS launched Money Means in 2016 to help give people clear and useful information about personal finance, to increase understanding and confidence when dealing with money.

9/8/2017 2:31:47 PM