Want to pay less tax on your investments? An ISA could be the answer. It offers a tax-efficient means of saving, or investing, for the future. As such, it is worth considering for anyone with excess cash available.
It is possible to invest up to £20,000 per tax year across a range of ISAs. The process of opening the various types of ISAs is relatively simple and often does not involve significant costs. This makes ISAs accessible to a wide range of people.
There are, of course, a number of different types of ISAs. Here are some pros and cons of each one.
Cash ISAs are the most popular and simplest form of ISA, with the interest income received within them being tax free. Up to £85,000 of cash is covered by the Financial Services Compensation Scheme.
Cash ISAs may be becoming less popular due to continued low interest rates. At the time of writing, it’s tough to find a rate on cash savings better than 1.5%. Since the first £1,000 of interest income received from a standard savings account per year is tax-free, an individual would need to have £67,000 in such an account in order to start paying income tax. Therefore, they would need more than £67,000 in a Cash ISA in order for its tax-free status to become worthwhile.
Stocks and shares ISA
The number of stocks and shares ISAs opened each year is increasing. A stocks and shares ISA offers a simple means of investing in a wide range of stocks. Amounts invested through these ISAs are not subject to capital gains tax or dividend tax. The cost of holding a stocks and shares ISA is typically relatively low.
A stocks and shares ISA could offer significant long-term return potential. For individuals who have a long-term outlook, they may be worth considering instead of a cash ISA.
Stocks and shares ISAs have become a realistic alternative to a pension for many people. While withdrawals from a pension are taxed, no tax is charged on withdrawals from a stocks and shares ISA, which can be made at any time.
Innovative Finance ISA
Innovative Finance ISAs provide an opportunity for consumers to engage in peer-to-peer lending (where the capital is lent to private borrowers) and crowdfunding (where a project is funded through a large number of small contributions).
Although the returns on investments within an Innovative Finance ISA have the potential to be higher than for a cash ISA, there is no protection from the Financial Services Compensation Scheme.
Furthermore, the price paid for crowdfunded investments may be relatively high – especially when compared with the price of listed company shares.
A Lifetime ISA (LISA) can be opened by any adult under the age of 40. Up to £4,000 can be invested in a LISA per year (which forms part of the £20,000 overall ISA allowance), and the government pays a bonus of 25% on all amounts invested. The government bonus can be worth up to £33,000 in an individual’s lifetime, since contributions can be made up to age 50.
Withdrawals can be made at any time to fund an individual’s first home purchase. Otherwise, any withdrawals before the age of 60 will incur a 25% penalty.
Lifetime ISAs are best suited to individuals who can invest their money over a long period.
Help to Buy ISA
Help to Buys ISAs are designed to help people buy their first home. The government adds a 25% bonus to contributions. In the first month, up to £1,200 can be invested. Subsequently, it is possible to invest up to £200 (excluding the bonus) per month.
Although the returns on a Help to Buy ISA may be relatively low when compared with those on a stocks and shares ISA, the government bonus could make it a worthwhile product for individuals who are saving up for their first home.
A Junior ISA can be opened by a parent or legal guardian for a child under 18. The money can be invested in stocks and shares through an investment ISA, or can be held as cash by opening the ISA via a bank or building society. It is also possible to have a mixture of cash savings and stocks within a Junior ISA.
Up to £4,368 can be invested per year in a Junior ISA. The young person can take control of the Junior ISA’s management from age 16 and is able to withdraw some or all of the money from age 18.
Whichever ISA is suitable for your personal circumstances, they all offer significant tax advantages. Over the long run, this could lead to improved returns and a better financial future for you and your family. As such, opening an ISA today could be a shrewd move.
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