You’ve probably heard a lot about ISAs – they’re on the news a lot and they’re advertised all over the place – without ever really knowing exactly they are.
We all know that they’re savings accounts, but beyond that? Something about tax? They’re better for saving?
So we thought we’d put together a quick guide to everything you need to know about ISAs, without all of the complicated jargon.
What are ISAs?
Put simply, ISAs are savings account that you never have to pay tax on, as long as you don’t deposit over £15,240 a year.
They are broken up into more complicated terms – cash ISAs, investment ISAs and help-to-buy ISAs for instance – but they’re all, fundamentally, the same. You don’t get charged any tax on the interest that you make, up to a certain threshold.
OK, got it. So what are the different ISAs?
There are seven different types of ISAs – from your everyday, standard ISA (and the Junior ISA for those under 16) all the way through help-to-buy ISAs and investment ISAs, each with different rules and technicalities.
Your everyday, standard ISA is the easiest ISA to understand and, for that reason, is the most common. You can open an ISA from your high street bank, as long as you are a UK resident aged 18 or over (or 16 for a JISA). At the beginning of every tax year, your ISA allowance is renewed. Your ISA allowance is the amount you’re allowed to deposit into the account. This year, you’re allowed to save £15,240 without paying tax (including on the interest). Next year, the total goes up to £20,000.
Plus (bear with us, this is where it gets a little more complicated), you’re allowed to split your ISA allowance over a number of ISAs.
As an example, you’d be allowed to keep £8,000 in a standard ISA accumulating interest and – in an investment ISA – have another £7,240 that is being invested by the bank to earn you extra money and interest. Next year, you can have £20,000 divided between the two accounts, however you choose.
(For a detailed breakdown of the other types of ISA account, see this great guide from This Is Money
Who can have an ISA account?
Anyone, really. Provided you’re over 16 years old and a UK resident, the world is your ISA oyster.
So which ISA is right for me?
That’s a complicated question, as each person wants different things from their ISA account. Some people want to make money from it, others want to avoid paying tax on their interest.
To decide which ISA is right for you, ask yourself two questions:
• Would you be willing to risk losing some of your money for the opportunity to earn a lot of money?
• What are you saving for?
The answer to each of these questions will help you decide which account you’re looking for – although, sometimes, the answers are interlinked and overlapping.
Let’s look at a few examples:
Let’s say that you’re thinking of opening an ISA with your partner to save up for the deposit for a mortgage. You both have a steady income and you’d like to slowly tuck away some money every month that will eventually build into a deposit on your first house. You’re in no hurry to buy, but you’d like to make steady progress with your saving.
In this instance, it’d probably be a good idea to go for the Help-to-Buy ISA. A Help-to-Buy ISA allows you to save £1,200 in the first month, and then £200 per month after that. When you eventually use the money to buy your first home, the government adds an 25% of the total (up to a maximum of £3,000), helping you to buy the property.
On the other hand, let’s say that you’ve got a decent amount of savings, but you’d like to build a nest egg for when you retire. You’re quite comfortable living on your income, but would like a little cushion in case of emergency. At the same time, you’d like to try a few risky investments in the hope of winning big.
In this scenario, you can almost get the best of both worlds – you can split your savings between an ISA (which now allow you instant access to your money, if you need it) and an investment account that takes medium to high risks with your money. (If you’re feeling particularly bold, you might even consider an innovative ISA – which lends your money to other people, through a peer-to-peer lending system and charges them interest. Of course, there’s the risk they won’t pay you back, but split over lots of little loans, you can stand to make big money.)
If you’re looking to start making savings, we recommend starting an ISA – especially if you’re self employed.
And, for other great tips on saving money, why not check out other posts on our blog? You’ll find everything from tips on saving for a deposit for your mortgage to ways to cut your expenses and have a bit of extra cash.