Get in the know about ISAs
Your essential guide to tax-free savings
ISAs have been around for almost 20 years, and were introduced to encourage people to save. For that reason they were given tax-free status on the interest you earn. From 2017, the government increased the amount you can save into any sort of ISA to £20,000 per year.
How many types of ISA are there?
Most people think there are only two types: Cash ISAs and Stocks and Shares ISAs. In the last few years these have been joined by the Help to Buy ISA to help people save for a house deposit and the Lifetime ISA for the under-40s – both receiving an annual bonus from the government – as well as the Innovative Finance ISA allowing your investment to be in peer-to-peer lending, the Inheritance ISA, which accepts balances inherited from a deceased spouse on top of your own allowance and Flexible ISAs allowing you to add money, then withdraw it, then add it again without using up more of your allowance.
What protection do I have with a cash ISA and Stocks & shares ISA investments?
According to the FSCS, the compensation rules are as follows: Stocks and shares ISAs would come under investments, so 100% of the first £50,000 would be protected per banking authorisation. Cash ISAs are protected under deposits up to £85,000 (£170,000 for joint accounts).
Why ISAs are still a good way to invest
The most important part of any ISA is its tax-free status. It’s simply a ‘wrapper’, which shields your savings and investments from tax – there’s no income tax on dividends or interest income, and no capital gains tax on any profits you make.
How much can be invested in ISAs?
The 2017 ISA allowance increased from £15,240 to £20,000. If you can, it’s worth investing the maximum every year, as it’s very much ‘use-it-or-lose-it’ regarding your allowance.
What does consolidation mean?
As ISAs are based on an annual allowance, investors have tended to open a new account each tax year – particularly for cash ISAs where a higher rate is often offered just for the first year or two. The result is that many people now have up to three ISAs, with each earning little interest.
However, these old accounts can be combined and transferred into a new ISA, retaining their tax-free status and your review will identify if improved returns can be suitably achieved.