ThinkIFA guide to ‘ISAs’
Individual Savings Accounts were introduced by the government back in 1999 to encourage people to save tax-free.
Each year you can put a set amount in your ISA and the interest you earn on your savings is completely tax-free.
Please note that ISAs have now been updated to NISA’s (New individual savings accounts). For further details please read our NISA article here.
What are ISAs?
Imagine you have an ordinary savings account which you pay into every so often. The basic tax rate for savings is 20% which is taken from your interest before you even receive it.
High rate tax payers may have to give up as much as 45% of their interest. Having an ISA means that some of your money is placed in a wrapper where the taxman cannot touch it, so all of the interest you earn on those savings is yours.
You can open a Cash ISA, a Stocks and Shares ISA or both, but no more than one of each. You get a maximum allowance each year (calculated from April to April) and for the tax year 2014/2015 that is £15,000 (from July 2014).
Which Cash ISA Should I Get?
Just like savings accounts there are many different types of ISA accounts such as:
- Instant Access ISAs
You can withdraw your money any time you wish without losing the tax benefits.
- Fixed Rate ISAs
These will guarantee you what is usually a good rate of interest for a set period but may impose penalties if you make a withdrawal.
- Base Rate ISAs
These offer you a rate which keeps in line with the Bank of England base rate.
- Junior ISAs
The children’s isa was introduced to replace the ‘Child Trust Fund’ and is a tax efficient savings account for children. For further details please read our Junior ISA guide.
Stocks and Shares ISA
You can open a stocks and shares ISA either instead of or with a cash ISA. Again there are many different types from shares in individual companies to collective investments and you would be advised to seek financial advice before you make your investment.
Should you make a profit on your stocks and shares, this too will be tax-free with no capital gains tax, the chance to reclaim tax on bonds and any dividend income will only be taxed at 10%.