AD – this article was created as part of an on-going partnership with Wealthify.
ISAs (‘Individual Savings Accounts’) are little gifts from the UK Government that could help to make your money work harder.
They’re designed to encourage UK tax residents to save or invest more of their money by allowing them to do so tax-efficiently – meaning you’ll get to keep more of the interest, dividends, and other returns you earn from your savings.
Considering opening an ISA? Below, we outline some of the key considerations to help you make the right decision.
What is the yearly ISA allowance?
You can save and invest up to a certain amount tax-free each year – this is called your ‘annual allowance’. This entire allowance can be used in one type of ISA (such as a Cash ISA) or it could be split across the different types of ISAs that are available (for example, half in a Cash ISA and half in a Stocks and Shares ISA).
The allowance for the current tax year (which ends at midnight on 5th April 2022) is £20,000, although this amount is subject to change each year. Once this allowance runs out, you can’t carry it over into the next tax year – so you may want to take advantage of it.
However, do remember that £20,000 isn’t a target that you need to reach. You can pay in as much or as little as you like up to this amount each year.
How many ISAs can I have?
As many as you like! But you can only open one of each type (such as Stocks and Shares or Cash) per tax year. This means that your annual £20,000 ISA allowance (which is subject to change) can be used in one ISA or spread across the different types you have.
What different ISAs are available?
There are 4 types of ISAs available for adults and 2 for children. Deciding which ISA(s) to open will depend on your own unique circumstances, financial goals and risk appetite.
Let’s walk you through each ISA available, so you can decide whether any of them are right for you.
Cash ISA
Requirements: UK resident aged 16 or over
Cash ISAs work in a very similar way to traditional savings accounts, but the key difference is that you don’t have to pay tax on any of the interest earned from your savings. With a traditional savings account offered by a bank or building society, you would need to pay income tax on interest exceeding £1,000.
As with traditional savings accounts, there are different types of Cash ISAs you can open. These are:
Instant-access: This is a type of Cash ISA that will enable you to freely deposit and withdraw your money whenever you like. These types will usually have lower interest rates than their counterparts.
Fixed rate Cash ISAs: These require you to lock away your cash for a fixed amount of time (usually at least a year) before you can withdraw it. The longer you commit to not accessing your money, typically the better the interest rate, although this can’t be guaranteed for certain.
Regular savings Cash ISAs: These involve depositing a fixed amount of money into the account each month and will usually have some form of withdrawal limit and/or penalty. Due to their stricter terms, they typically offer the highest interest rates of the 3 types of Cash ISAs that are available.
One thing you might want to bear in mind is that basic rate taxpayers (who pay 20% on their earnings above the Personal Allowance) are currently able to earn up to £1,000 interest tax-free in a traditional savings account.
Stocks and Shares ISA
Requirements: UK tax resident aged 18 or over
Also known as an ‘Investment ISA’, Stocks and Shares ISAs allow you to invest your money (in assets like shares, funds, commodities and property) to give it the opportunity to grow over the years. You won’t need to pay capital gains tax or income tax on your money as it grows in this type of ISA.
You can either choose investments yourself (in the case of a Self-invested Stocks and Shares ISA) or select an online investment service (or ‘robo adviser’) like Wealthify that will do this for you – which could be a great option if you’re a beginner who is investing for the very first time.
Investing in a Wealthify Stocks & Shares ISA is quick and easy to do, and you don’t need to have thousands saved in the bank to start investing with them either. You can open a Wealthify Plan with just £1, choose an investment style that suits your risk appetite, and pay in as much or as little as you like, as often you as you like. You can even decide to invest in ethical companies that align with your values. Then, Wealthify’s experts will take care of the rest, managing the investment decisions and keeping you informed of any changes they make to your Plan.
However, please remember that the value of your investments can go down as well as up, and you could get back less than invested.
Lifetime ISA
Requirements: UK resident aged between 18 and 39
Lifetime ISAs are designed to help you save for your first home or retirement. They replaced Help to Buy ISAs (which could also be used to buy your first home) as these could no longer be opened after 30th November 2019.
With a Lifetime ISA, the Government will pay you a 25% bonus on deposits of up to £4,000 a year, meaning that each year, you could benefit from a £1,000 bonus on top of your savings.
So, if you open a Lifetime ISA at age 18 and deposit £4,000 per year, then you could receive a bonus of £32,000 by the time you reach the maximum limit at age 50.
Lifetime ISAs are available as Cash or Stocks and Shares, so you can choose whether to save or invest your money depending on your preference.
In addition to having to be aged between 18 and 39 to open this type of ISA, Lifetime ISAs come with a number of other rules, including:
You must be a first-time buyer if you want to use it to purchase a property
The property you buy can’t be worth more than £450,000
The ISA must be open for at least 12 months before you use it to buy a property
The property must be bought with a mortgage
The property purchase must be carried out through a conveyancer or solicitor
If you want to use the money in your ISA for a reason other than first-time buying or retirement, you will be charged 25% of the amount you withdraw
If you are saving for your first home and plan to buy a property for less than £450,000, then a Lifetime ISA could be a great way to benefit from tax-free saving or investing as you could receive a substantial Government bonus.
It could also be a great option if you have maxed out your employee pension contributions and are looking for a way to save more towards your retirement. However, if you do want to use the money in a Lifetime ISA for retirement, please remember that you won’t be able to access it without penalty until you’re 60. However, this could be subject to change in future.
Junior ISA
Requirements: UK resident with a child under the age of 18
If you’re a parent or legal guardian, you could save or invest towards your child’s future with a Junior ISA (or JISA).
This can be done from as early as the day they’re born. It’s completely up to you how much you contribute for your child, as long as it remains within the Junior ISA allowance – this is currently £9,000 for the 2021/22 tax year but is subject to change in future.
And with some Junior ISAs (such as Wealthify’s), your friends and family members can even choose to pay in too! However, Wealthify only offers a Junior Stocks and Shares ISA, which means that your child’s saving’s will be invested in the stock market.
The money in any type of Junior ISA can be accessed by the child when they’re 18, at which point they’ll be able to decide whether to keep it in an adult ISA to carry on saving or investing or to simply withdraw all of it. For example, your child might want to use it to buy their first car at age 18 or keep it saved or invested for a house deposit later in life.
There are two types of Junior ISAs available: Junior Cash ISAs and Junior Stocks and Shares ISAs. Although your child can only have one of each type, you could open a Junior Cash ISA and a Junior Stocks and Shares ISA and pay into both at the same time.
Like a regular Cash ISA, a Junior Cash ISA will allow your child to accrue interest on their savings. With a Junior Stocks and Shares ISA, the money that’s paid in will be invested in assets to give it the opportunity to grow. However, please remember that with all investing, your capital is at risk and your child could get back less than what you or any contributors have invested for them.
It’s easy to get started with Wealthify’s Junior Stocks and Shares ISA, and you can start investing for your child with as little as £1. You can also choose to make their investments ethical to help build a better future for them in more ways than one.
Innovative Finance ISA
Requirements: UK resident aged 18 or over
Perhaps the lesser-known type of ISA is the Innovative Finance ISA, which involves ‘peer to peer lending’ (also known as P2P lending). This is a form of investing that involves lending money to individuals and/or businesses for a fixed amount of time, and they will pay back the borrowed amount with interest.
As you would be loaning your savings directly to the borrower in this case, the interest rates for P2P lending are typically much higher than they are with other types of saving. However, one thing to consider is that there is an added risk with this type of ISA because there is the
possibility that the borrower could default on their loan – and if this does happen, you might not get your money back.
We hope this guide has helped you to decide which ISA(s) might be right for you. Just remember to fully consider your financial goals and timelines when considering these options.
Ready to start making the most of your annual ISA allowance? Want to see if you could get more from your money this year by investing it in the stock market? Find out more about Wealthify’s Stocks and Shares ISA and how simple and affordable it is to become an investor.
The tax treatment depends on your individual circumstances and maybe subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested. With a Junior ISA, your child could also get back less than what was invested for them.
You should seek financial advice if you're unsure about investing.
Information sources:
1. https://www.gov.uk/individual-savings-accounts
2. https://www.gov.uk/lifetime-isa
3. https://www.gov.uk/junior-individual-savings-accounts
4. https://www.wealthify.com/blog/what-are-the-different-types-of-isa