ISAs - A Great way to Invest!
ISA is an acronym for Individual Savings Account
It is a tax efficient way of saving and investing
You receive an ISA allowance every tax year (currently £20,000)
There are 5 different types: Cash, Stocks & Shares, Innovative Finance, Help to Buy, and Lifetime ISAs
These are available to those aged: 16+ (Cash), 18+ (Stocks & Shares and Innovative Finance) and 18-40 (Lifetime)
Junior ISAs are available to those under-18s
Every (tax) year - 6 April to 5 April the following year - the government gives you an ISA allowance (currently £20,000), which allows you to save and invest money in tax-efficient way.
An ISA is a ‘wrapper’: it's like an umbrella that simply protects the money you save and invest from being tax.
Its tax efficient, because the money you make from the investments doesn’t get taxed in the same way as your salary, the money you earn from working. You pay no Income Tax on the interest or dividends you receive from your ISA and any profits from investments are free of Capital Gains Tax.
You can save this money in cash, or invest it in stocks and shares, or a combination. They are known as Cash ISAs and Stocks and Shares ISAs and are the two types of ISAs. You get to open one of each every tax year.
You can choose to open your ISA with the same provider each year, or choose a different one. You can also choose a different provider for your Cash ISA to the one for your Stocks and Shares ISA.
Recently, the government has also introduced Innovative Finance ISA, which allows you to earn tax-free interest on loans arranged through a peer-to-peer (P2P) investment platform, such as crowdfunding platforms.
The Allowance – things to know
If you don’t save up to allowance (£20,000), you lose it. That means you can’t carry it forward next year. So if you can only save £5,000, you won’t be able to carry forward the rest of your allowance, £15,000 (£20,000 - £5,000).
You can choose between making a lump sum contribution or regular savings plan. So for instance, you can set up a monthly direct debit to pay into your ISA.
Flexy ISA – Greater Flexibility
If you need to take out money from your ISA, for example, if you have an emergency and are short on cash, then you can do this and replace the money later, as long as you do it in the same tax year. This is a called a flexible ISA, and it essentially gives you greater flexibility over the use of your savings.
So if you manage to save £20,000 into your 2017/18 ISA, and want to take out £5,000 for an emergency and replace it later, you can do - just as long as you do this within the same tax year.By doing so, you retain the tax benefits of having the ISA.
This only applies to Cash ISAs, Innovative Finance ISAs and elements of cash within Stocks & Shares ISAs.
Not all ISAs are flexible, which means if you take money out you can’t replace it i.e. if you save £20,000 and want to quickly take out £1,000. When you go back to put that money in, they’ll tell you you’ve used up your ISA allowance – you can’t reset that element of your allowance. So you need to check with the provider if they offer flexible ISAs.
[This flexibility is not available for Junior ISAs, Help to Buy ISAs, or Lifetime ISAs.]