ISA stands for Individual Savings Accounts. They are the most tax-efficient way to save money in the UK.
Every tax year, each UK resident is afforded an ‘ISA allowance’ which is the maximum amount they are permitted to save into an ISA whilst still reaping the tax benefits. The 2021/22 ISA allowance is £20,000.
Understand the types of ISA
For those looking for a safe and easily accessible way to earn interest on your saved cash, whilst any interest earned is protected from capital gains tax.
Stocks and Shares ISA
For those looking for more potential growth on their savings, the stocks and shares ISA provides tax-free returns on investments that are usually in the form of a fund.
Remember investments can go down as well as up and you could get back less than your original investment.
For those happy to lock away their savings for a fixed term in exchange for more favourable interest rates.
For those looking to save for their first property or retirement, the Lifetime ISA attracts a 25% government bonus on all contributions.
Self Select ISAs
For more experienced investors, this investment ISA is similar to a stocks and shares ISA, but with the difference that you are able to choose your own investments.
Innovative Finance ISA
For people looking to earn tax-free interest on peer-to-peer loans.
Are ISAs safe?
Yes, an ISA is a completely safe vehicle for your savings, however there are some checks that you can conduct to ensure the provider you are considering is meeting the highest safety standards.
- Make sure they are regulated by the Financial Conduct Authority
- Ensure they are a member of the Financial Services Compensation Scheme
- Check that they are meeting stringent security measures for accessing your account
5 simple steps to starting your first ISA
Step 1: Choose your ISA type
Decide which of the above products best meets your requirements. You should ask yourself the following:
- Can you lock your money away?
- Are you averse to any kind of risk?
- Are you looking to maximise on growth?
- Are you saving to buy your first home or for retirement?
- Do you have investment experience?
Step 2: Choose your provider
Take into account the following when deciding which ISA provider is best for you:
- What is the cost of the ISA?
- What interest is offered for a Cash ISA?
- What investment opportunities are there?
- Is the provider offering a fully managed investment service?
- Does the provider have a mobile app for managing your account?
- Does the provider have internet banking?
- What is the minimum amount you can contribute?
- Can you set up regular contributions?
This is not an exhaustive list, however, it will provide you with a starting point when making your selection.
Step 3: Decide how much money you want to save
Would you like to save regularly into an ISA or are you looking to put aside a lump sum?
Work out what suits your circumstances best. It may be that you are saving towards a particular goal, in which case you can calculate your time frames and contribution amounts to ensure you meet your aspirations.
The key thing here is to take into account your ISA allowance for each tax year that you contribute towards your pot.
Step 4: Collate your documentation
Having your documentation ready in advance when you open an ISA can help avoid unnecessary delays. This includes:
- National Insurance Number
- Government issued ID such as driving licence or passport
- Proof of address such as bank statement or utility bill
Step 5: Complete an application
Most applications can be completed online, however you should ensure you are familiar with the tax rules for current tax year before making a deposit.
ISA Frequently asked questions
I already have an ISA, can I open another one?
Yes, you can open one of each ISA type in the same tax year, every year, regardless of any existing ISAs you may already have. In fact many providers will save their best deals for new accounts so it is always worth checking to see if you can get a better deal elsewhere, and this is especially true for cash ISAs whereby the interest rate can deplete over time.
How can I transfer an existing ISA to a new provider?
Firstly ensure your new provider accepts transfers. If this is the case, they should be able to provide you with a transfer form. Most providers will then take care of the transfer on your behalf.
Am I paying tax on my current savings?
If you are earning interest on cash that you currently have in a savings account then it is possible that you are paying income tax although this will depend on whether you are earning in excess of the personal savings allowance.
What is the personal savings allowance?
The personal savings allowance is a tax-free allowance that lets taxpayers earn interest on their savings without paying tax on that interest. For 2021/22 that allowance is £5,000.
Can I lose money in an ISA?
You can’t lose money in a cash ISA, however, the rate of interest can fall below the rate of inflation, meaning your money will lose value over time.
However, an investment ISA comes with a degree of risk as the value of investments can go up as well as down.
Stocks and shares ISAs should be considered a long term investment in order to ride out any volatility in the market and you should ensure you have a well diversified portfolio in order to mitigate any risk.