At Continuum, we believe almost everyone should have an ISA. ISAs offer UK residents the opportunity to save up to ยฃ20,000 each tax year โ and not only are the returns potentially exciting, you should also be able to enjoy them as they are not taxed.
With most forms of savings or investment, you pay tax on the interest or profits your contributions earn. With an ISA, or Individual Savings Account, you pay no income tax on the money your money earns, and no capital gains tax when you cash in your holdings. If the taxman canโt touch your money, it could potentially grow faster.
With interest rates at their highest for a decade many people are discovering that they are paying tax on savings for the first time. The special tax status of ISAs is all the more important as a result.
For tax year 2024/2025, If you are a basic-rate taxpayer you pay tax on interest of more than ยฃ1,000 in a year, or ยฃ500 if you are a higher-rate taxpayer. If you are an additional-rate taxpayer you get no savings allowance at all. Enjoying 100% of your returns rather than 80%, 60% or even 55%, depending on the tax bracket you are in makes an ISA more rewarding.
In fact, the advantages of ISAs are so valuable, the government puts a limit on the amount you can save into your ISAs each year. This has been ยฃ20,000 for some years now, and the chance to get tax-free growth on that sum means you need to use it very carefully, especially as if you donโt use the allowance in any tax year, itโs lost. So the real question for most people is not โShould I have an ISA?โ but โhow should I use my annual ISA allowance?โ
There are actually several different ISAs to choose from.
Cash ISA
A Cash ISA works in much the same way as a standard savings account. You can choose an easy-access ISA to withdraw your money freely or, for a slightly higher interest rate, a fixed-rate product, where you leave your money untouched for a fixed period.
Under current rules, you need to be 16 or over to open a Cash ISA.
Stocks and shares ISA
A Stocks and Shares ISA gives you the tax-efficient advantage of an ISA for investments. You can buy shares in individual companies, pooled funds, investment trusts, bonds and even commodities such as oil or gold.
These investments are then placed inside theย tax efficient Isa wrapper, meaning you wonโt pay capital gains tax and dividends are tax-free, too.ย
Historically, stock market returns beat gains from interest.
Experts recommend investing for the longer term โ at least five years โ and being aware of the element of risk of trading on the stock market. The trade-off is that over the long-term, your money should potentially grow faster than in a Cash ISA.
You need to be at least 18 to open a Stocks and Shares ISA.
Lifetime ISA
The Lifetime ISA was designed to provide a deposit for their first home or boost income in retirement.
You can pay in up to ยฃ4,000 a year โ which forms part of the ยฃ20,000 yearly ISA allowance โ and get up to ยฃ1,000 extra with government bonus payments (which you may receive until the age of 50). The money can be used to buy a first property worth up to ยฃ450,000 or help fund your retirement, but if you take the money for any other reason thereโs a 25% exit penalty.
You must be between 18 and 39 to open a Lifetime ISA – which can be a cash or stocks and shares account.
Innovative Finance Isa
An innovative finance ISA invests peer-to-peer lending, where investors lend money to individuals or businesses in return for interest.
They can offer attractive returns, but they are not guaranteed, and they come with much bigger risks. These ISAs are still not covered by the Financial Services Compensation Scheme, so your money is not protected if anything goes wrong.
Partly as a result, Innovative Finance ISAs havenโt proved very popular.
Junior Isa
A Junior Isa can be opened for under-18s any time after their birth. It has a unique annual allowance of ยฃ9,000.
Parents or legal guardians can set up a cash or investment Junior ISA and any family member, godparent or friend can contribute to it.
The money is then under lock and key until the child reaches 18, though children can start managing their own account once they reach 16. Those aged 16 or 17 can have a Junior ISA allowance plus a separate cash ISA allowance.
You can transfer your ISA from one provider to another, and even change the type of ISA. If you spot a better rate elsewhere you can move your money, just like with a regular savings account – but remember not all providers will accept transfers.
A new British ISA was announced by the previous Chancellor in the Spring 2024 Budget, which offers an additional allowance of ยฃ5,000 per year, however, there is as yet no confirmation as to when or if this will start.
Finding out more
Your ISA allowance is too valuable to waste, and getting the type of ISA that is appropriate for you, and from the provider that is suitable for you is essential.
A call to us at Continuum could be the simplest way to discover the ISA you need.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a suitable investment or savings strategy, you should seek independent financial advice before embarking on any course of action.
Past performance is not a guide to future performance and should not be used to assess the risk associated with the investment.
Stocks and Shares ISAs do not include the same security of capital which is afforded with a deposit account.
Levels, bases and reliefs from taxation are subject to individual circumstances and may be subject to change.
The Financial Conduct Authority does not regulate taxation advice.
Your home may be repossessed if you do not keep up repayments on your mortgage.
A pension is a long-term investment; the fund value can go down as well as up and this can impact the level of pension benefits available. Pension Income could also be affected by interest rates at the time benefits are taken. Pension savings are at risk of being eroded by inflation.
