What is an ISA? What makes it different from any other savings or investment vehicle? What are the different types of ISAs? How much can I save or invest in an ISA? Can I open an ISA for my child? I get asked these questions repeatedly. Well, here are the answers!
Let’s start with the definition of an ISA. An ISA is an Individual Savings Account which allows you to invest in cash, shares and unit trusts without having to pay any tax on the interest, dividends and capital gains that you may earn.
You get six different types of ISAs. They are as follows:
- Cash ISA. This is also known as a basic ISA and is essentially a savings account. Any interest earned on a Cash ISA is tax free.
- Stocks and Shares ISA. This is essentially an investment account in which you invest in stocks and shares. Any dividends or capital gains earned on a Stocks and Shares ISA is tax free.
- Lifetime ISA. This ISA is only available for first-time buyers and / or the under 40s. If this applies to you, you are allowed to invest £4,000 per year in a Lifetime ISA for either a house deposit or for your retirement. In addition to any interest, dividends or capital gains being tax free, the government will also give you a 25% top up on the amount you have contributed in a Help to Buy ISA.
- Innovative Finance ISA. This is a peer-to-peer lending account in which you can lend money to individuals or small businesses without paying tax on any interest earned.
- Help to Buy ISA. This is a savings account for first-time buyers. You are allowed to save up to £3,400 in the first tax year and then £2,400 during each tax year thereafter. In addition to any interest being tax free, the government will also give you a 25% top up on the amount you have contributed in a Help to Buy ISA.
- Junior ISA. This can be either a savings account or an investment account for under 18s. You are allowed to save up to £4,260 per tax year free of tax on the interest, dividends or capital gains.
The current tax year runs from the 6th April 2018 to the 5th April 2019. You can invest up to £20,000 in ISAs during this tax year.
You’re allowed to split this allowance any way you like across a Cash ISA, Stocks and Shares ISA, Lifetime ISA (maximum of £4,000) and an Innovative Finance ISA. For example, you could put £6,000 in a Cash ISA, £10,000 in a Stocks and Shares ISA and £4,000 in a Lifetime ISA in this tax year.
NOTE: You CANNOT contribute to a Cash ISA in the same tax year as contributing to a Help to Buy ISA.
The deadline for adding money in this tax year is midnight on the 5th April 2019.
If you already have an ISA and would like to transfer it to a better paying ISA, remember to do a transfer and not a withdrawal. If you withdraw your money it immediately loses its ISA status and investing it elsewhere will come out of your ISA allowance.
Any other questions? Pop them in the comments section and I’ll do my best to answer them.