(The value of investments and the income they produce can fall as well as rise, you may get back less than you invested).
We need to talk about Individual Savings Accounts (ISA’s), because back in the day they were very restrictive and a bit boring; but in July 2015 the rules were relaxed and although the amount you can save is still limited at £20,000 PA for this current tax year (which is a fair amount for most of us) – you can now choose whether you want to split this between stocks & shares (S&S), cash, innovative finance, Help to Buy ISA’s and the new Lifetime ISA.
An ISA is not a product or an investment in itself, rather, it’s a box in which you can hold ‘stuff’ and any gains made within the box will grow in a tax free environment.
Each tax year (6th April – 5th April), you get an ISA allowance which sets the maximum you can save within the tax-free wrapper, the limits are different depending on which type of ISA you choose (more details below). Unfortunately, if you don’t maximise your ISA allowance in any single year, the unused allowance doesn’t roll over, so use it or lose it – forever! However, there is no lifetime limit on how much you can build up in these bad boys, as such, there are now ISA millionaires in the UK today!
The previous ISA system used to limit how much you could put into each pot and your options were between cash or S&S – you’d get half your allowance in cash and half in S&S, or you could choose to put it all in cash, or all in S&S.
There are a few quirks to the system, though. For example, you can only put £4,000 in the Lifetime ISA every year, which means you could put the remaining £16,000 into any of the other options.
Any savings or investments which stay within the tax-free ISA wrapper will continue to earn interest and reap the tax benefits until you withdraw the money. On withdrawal, the funds can be taken free of tax!
There are several types of ISA available, below is a simple table to introduce the different types along with their current limits:
(Tax treatment varies according to individual circumstances and is subject to change).
| Official name | Also known as | What type of account is it? | Allowance 2017/18 | Tax advantages | Sweeteners | Where can I get one? | |
| Cash Isa | Basic Isa | Savings account | £20,000 | Tax-free interest | n/a | Banks and building societies | |
| Stocks and shares Isa | Investment Isa | Investment account | Tax-free gains, no further tax on dividends, tax-free interest | Fund supermarkets, stockbrokers, investment companies | |||
| Innovative Finance Isa | Peer-to-peer Isa | Peer-to-peer lending account | Tax-free interest | Peer-to-peer lending firms | |||
| Lifetime Cash Isa | Lisa | House deposit and/or retirement savings and investment accounts for first-time buyers and/or under 40s | £4,000a | Tax-free interest | 25% top-up on contributions up to £4,000 a year | Banks and building societies | |
| Lifetime stocks and shares Isa | Tax-free gains, no further tax on dividends, tax-free interest | Fund supermarkets, stockbrokers | |||||
| Help to Buy Isab | H2B Isa | Savings account for first-time buyers | £3,400 | Tax-free interest | 25% top-up from the Government | Banks and building societies | |
| Junior Cash Isa | Jisa | Savings and investment accounts for under 18s | £4,128 | Tax-free interest | n/a | Banks and building societies | |
| Junior stocks and shares Isa | Tax-free gains, no further tax on dividends, tax-free interest | Fund supermarkets, stockbrokers | |||||
| Additional options | |||||||
| Inheritance Isa | A term some providers are using to describe accounts that will accept Isa balances inherited from deceased spouses. The surviving spouse gets to subscribe the balance of the deceased’s Isa in addition to their own allowance for the tax year. | ||||||
| Flexible Isa | A variation on cash and stocks and shares Isas that incorporates new rules allowing you to add money, then withdraw it, and then add it again without using up more of your allowance. | ||||||
Notes: Merged cells indicate that your contributions can be split between two or more types of Isa in the same tax year. Lifetime Isas available from 2017-18.
a Lifetime Isas have a limit of £4,000, which is part of the £20,000 allowance.
b You can’t open a help to Buy Isa and a cash Isa in the same year, but some products offer ‘split’ Isas allowing you to have both up to the allowance maximum.
Finally, a quick point on Inheritance Tax – While assets left to a spouse or civil partner are not subject to inheritance tax, ISA’s left to anyone else are taxed if the value of the estate exceeds the tax-free limit. Unless it is invested in Alternative Investment Market (AIM) shares, many of which qualify for Business Property Relief (BPR) if owned for at least 2 years and still held on death…but more on that another time!
(Here comes the risk warning: – Investments can go up or down (obviously) and there are no guarantees. Past performance is not an indication of future performance *yawn*. You may get back less than you invested)
Until next time…
Financial Planner | Financial Adviser | Investment Advice | Pension Advice | Insurance Advice | West Yorkshire
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