Since their introduction in 1999, Individual Savings Accounts (ISAs) have become one of the UK’s most popular ways to save. In fact, FTAdviser states that a record £9 billion was invested in ISAs in April 2023.
ISAs are savings and investment accounts that shield your money from Income Tax, Dividend Tax, and Capital Gains Tax (CGT). They can provide you with a tax-efficient way to save and invest for your future.
What’s more, there are several different types of ISA on offer, each with their own features and benefits. So, with so many ISA options available to you, continue reading this indispensable ISA guide to discover the features of various popular types of ISAs, and the pros and cons.
You can contribute £20,000 into all of your ISAs in 2023/24
Perhaps the greatest benefit of ISAs is that they allow you to save tax-efficiently. Indeed, unlike traditional savings accounts, any interest or returns from your ISAs are free from Income Tax and CGT.
This means that they can provide you with an effective way to grow your wealth without being subject to tax.
Though, since they have these tax benefits, you can only save so much into them in any given tax year. As of the 2023/24 tax year, this ISA allowance stands at £20,000. It’s important to note that this limit applies across all of your ISAs if you hold more than one account type.
It’s also worth remembering that your ISA allowance doesn’t roll over to the next year if you don’t use it before the end of the financial year.
4 different types of ISA for you to choose from
If you wish to save in an ISA, there are several different options for you to grow your wealth tax-efficiently. Read on to discover some of the most popular ISAs on offer.
1. Cash ISA
A Cash ISA is perhaps one of the simplest and most popular forms of ISA available. They work much like a traditional savings account although the interest you receive is paid free of Income Tax.
Better yet, there’s absolutely no risk to your capital, as long as you hold less than the Financial Services Compensation Scheme (FSCS) limit of £85,000 with a single provider.
However, much like traditional savings accounts, it’s important to consider the effect that high inflation could have on your savings. Indeed, the Office for National Statistics reports that the annual inflation rate was 7.9% in the 12 months leading to June 2023.
Meanwhile, Moneyfacts states that the best rate on offer for an easy access Cash ISA is 4.35% (as of 14 August 2023).
When inflation is higher than the interest you earn on your savings, your wealth’s purchasing power is eroded in real terms. For instance, if you saved your entire £20,000 allowance in your Cash ISA a year ago, and received 4.35% interest, you’d have £20,870 today, assuming interest is paid annually.
Though, with inflation at 7.9%, £20,000 worth of goods and services a year ago would cost you £21,580 today.
As you can see, your money would have lost value in real terms if you saved your entire £20,000 allowance in your Cash ISA.
2. Stocks and Shares ISA
Meanwhile, a Stocks and Shares ISA allows you to invest your money rather than hold it in cash. Like a Cash ISA, your wealth in a Stocks and Shares ISA is protected from Income Tax, and any returns you generate are free from CGT and Dividend Tax.
One of the main benefits of a Stocks and Shares ISA is that you could generate higher returns, potentially helping you combat the effects of inflation on your wealth. This is because you can invest in a range of shares, funds, and other assets.
However, it’s important to remember that investing can carry risk. Consider the below graph that shows the five-year performance of the S&P 500 US stock market index:
Source: Google Finance
As you can see, the index dropped considerably in 2020 following the initial Covid-19 lockdown. So, you need to be conscious of the fact that, when you invest your wealth through a Stocks and Shares ISA, the value of your investments may fluctuate somewhat.
That said, it’s worth noting that evidence shows long-term investing tends towards positive returns. Indeed, IG states that, from 1984 to 2022, the FTSE 100 index returned an average of 7.48% on an annualised basis.
Remember that the value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
3. Lifetime ISA
A Lifetime ISA (LISA) allows you to save the deposit for your first home, or to boost your retirement savings. You can open one if you’re between the ages of 18 and 40.
The allowance for a LISA stands at £4,000 as of the 2023/24 tax year, and when you make a deposit, the government will give you a 25% bonus on your contributions. This means that you can essentially earn £1,000 in government bonuses each year if you contribute the full £4,000.
You should remember that anything you contribute to your LISA forms part of your overall ISA allowance, meaning if you contribute the full £4,000, you can only deposit £16,000 into your other Cash and Stocks and Shares ISAs.
It’s important to note that a LISA is designed as a method of saving towards the deposit for your first home. If you withdraw money for a reason other than this, before the age of 60, you’ll typically face a 25% charge.
So, you need to be sure that you intend to use your savings for one of these purposes. FTAdviser reports that LISA withdrawal charges rose by 53% in 2022 as an additional 27,000 people redeemed their savings in response to financial difficulties.
4. Junior ISA
If you wish to help your children or grandchildren build a pot of wealth to fund their future, then a Junior ISA (JISA) could be a sound option.
JISAs were initially introduced in 2011 to replace Child Trust Funds, and they’re as tax-efficient as any adult ISA.
As of the 2023/24 tax year, you can place a total of £9,000 into a child’s JISA.
Then, when the child reaches the age of 18, they can access the funds in the JISA. This could help them get on the property ladder, set up their own business, or pay for their university studies.
Professional advice could help you decide which ISA would be the best choice for you
If you’re still unsure on what the best ISA choices are for you, then it may be prudent to speak with a financial planner.
We can examine your entire financial situation and make tailor-made recommendations based on your specific circumstances and financial goals.
We have decades of experience, so if you have any questions, please get in touch and speak to us today.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
