ISAs are designed to be simple – they replace the former Tessas and PEPs, and Minis and Maxis – but they confuse
many people. Once you understand what ISAs are and how to make the most of their tax saving advantages, you will fare better making use of them. There are two types of ISA – cash ISA, which is perfect for savings, and a Shares ISA, for investments. They have different limits and different advantages and disadvantages.
Cash ISAs are simply savings where the interest earned on them are not taxed, unlike the money in ordinary savings accounts which is taxed depending on your individual tax threshold, which could be up to 50%. This means that the interest earned on a cash ISA is likely to be significantly more than in a normal savings account.
The individual personal allowance for cash ISAs is £5,340, and the deadline to use it is the end of the tax year, on 5 April. Allowances don’t roll over, but next year you’ll have another personal allowance, which will rise with inflation.
Many forms of investment in stocks and shares can be made using your Shares ISA allowance, which has similar rules as with the cash ISAs – there is no tax payable on any interest earned.
It is better to use an official broker when making investments, and they will probably advise you to opt for an investment trust, which spreads out the investments, so as to minimise any risk of losses.
The individual personal allowance for Shares ISAs is a total of £ 10,680, which is to be made up of the cash ISA too – so if you use the maximum cash ISA allowance of £ 5,340, you will only be able to invest a further £5,340 in stocks and shares as part of your ISA allowance.
Withdraw money at any time
You are not usually tied in to holding your money in investment funds or savings accounts, when you use your personal ISA allowance. This is a common misconception – but in reality, you are free to withdraw your money at any time without losing the tax free incentives. However, once you do withdraw your cash, you may not re-invest it at a later date in the same tax year.