James Phang

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What is an ISA?

Important Note: This is not personal advice. If you are not sure whether an investment is right for you please seek advice. If you choose to invest, the value of the investment will rise and fall, so you could get back less than you put in.

In the UK, you can open an Individual Savings Account (ISA) which allows UK citizens to invest tax-free up to £20,000 per financial year.

Who Can Open an ISA?

Certain criteria will allow someone to open an ISA account in the UK.

You must be:

  • 16 or over for cash ISA

  • 18 or over for stocks and shares or innovative finance ISA

  • 18 or over but under 40 for a Lifetime ISA

You must also be either:

  • Resident in the UK

  • A crown servant or their spouse or civil partner if you do not live in the UK

You can get a Junior ISA for children under 18.

Please note you cannot hold an ISA with or on behalf of someone else

How do ISAs Work?

You can invest in four types of ISAs: Cash ISAs, Stock and Shares ISA, Innovative Finance ISAs and Lifetime ISAs. When opening an ISA you do not need to pay tax interest on cash in an ISA or capital gains from investments in an ISA. You do not need to declare any ISA interest, income or capital gains on it.

Every tax year (6th April to 5th April) you can save up to £20,000 in one type of ISA account or split the allowance across some or all of the other types of ISA accounts. Just to note you can only pay £4,000 into your Lifetime ISA in a tax and it contributes to your £20,000 limit per tax year. When a tax year finishes, your ISA will not close and you will keep your savings on a tax-free basis for as long as you keep the money in your ISA account.

  • Cash ISA - Similar to an ordinary savings account, except you do not pay tax on the interest.

  • Stocks are Share ISA – You invest money into shares in companies, units trusts and investment funds, corporate bonds and government bonds.

  • Lifetime ISA (LISA) – Help people save either for their first home or retirement. You can put in a maximum of £4,000 each tax year and you get a 25% bonus from the government. The bonus will be paid monthly. Within a lifetime ISA you get either save via a Cash Lifetime ISA or Stocks and Shares Lifetime ISA. You must be 18 or over but under 0 to open a Lifetime ISA. When you turn 50 you will not be able to pay into your Lifetime ISA or earn a 25% bonus. Your account will still earn interest or investment returns. You will be able to withdraw money if you are buying your first home or aged 60 or over.

  • Innovative Finance ISA – Earn interest on peer-to-peer loans that you give to other people or businesses without using a bank. There is a greater risk on this ISA and is not protected by the financial authority if the borrower was to collapse.

How to Open an ISA?

Upon reading this you may want to open an ISA and start investing tax-free however you are not sure how to start. There are many providers to choose from for each type of ISA. However, I will point out a few to start your research. The main thing to look out for is the monthly/yearly costs you may have when using a provider. Although they are small costs they will decrease your investment slightly. It is best to search for the lowest rate. See below for some providers to start your search with.

Summary

ISAs are a great way to save tax-free. With many focused on long term savings such as the Cash ISA, Stocks and Shares ISA or Lifetime ISA. You can only open/invest in one of each type per tax year with a maximum total limit of £20,000. Most of these ISA just involves opening an account and setting up a monthly payment and just leaving it to earn interest or investment returns. You can invest as low as £1 a month, you can adjust the amount you pay according to your financial situation. It’s never too late to open an ISA and start saving for your future. If you are unsure whether you should save or invest, check out my blog post on the matter to help you decide. Remember when investing you can receive less than you put in if you invest your money in the stock market. It’s best to ensure that you don’t need that money right now or later.

Video: ISA Accounts Complete Guide by Sasha Yanshin