What is an ISA?
An ISA is an Individual Savings Account. It allows you to save and invest money without having to pay tax on the potential returns you make on your money.
What are the rules?
The government has set tax rules limiting the total amount of money you can add to an ISA before you need to start paying Income or Capital Gains Tax. The annual limit for ISAs is £20,000 per current tax year. This allowance can be used in one ISA or spread across a combination of ISAs as long as you do not exceed the the annual £20,000 limit.
You can have multiple ISAs, however, you can only invest in one cash ISA in each tax year. Which means you can open multiple other ISAs in a single tax year and benefit from the tax-saving allowance in each of these cash ISAs.
There are six main types of ISAs:
1. Cash ISA
2. Stocks and Shares ISA
3. Lifetime ISA
4. Innovative ISA
5. Help to Buy ISA
6. Junior ISA
CASH ISA
What is it?
A Basic Savings Account
There are three different types of cash ISAs:
Instant Access Cash ISA
Instant Access Cash ISA allows you to pay in and withdraw money. This often means a variable rate of interest. The value of your savings will rise and fall according to interest rates
Fixed-rate cash ISA
These usually involve saving for some time, often 1-5 years. These, therefore, offer a higher interest rate. If you want to access your cash you will usually incur a penalty or a reduction in your interest rate. Fixed-rate ISAs often require a lump sum investment. Therefore by putting in a larger sum of money, this will allow you to maximise the benefit from the tax-free interest rate.
Regular Saver ISA
This involves making regular monthly savings contributions. This will most likely be a fixed amount and (not exceeding the total allowance £20k). Most regular savers will not allow you to withdraw any of your savings or face a penalty if you do so.
Provider?
Banks and Building Societies
Allowance for the year: £20,000
STOCKS AND SHARES ISA
What is it?
A Stocks and Shares ISA is an Investment Account. Unlike a Cash ISA, a Stocks and Shares ISA lets you chose where your money is invested, and provides you with a wide range of investment options to choose from including funds, shares, exchange-traded funds (ETFs) or investment trusts. Often the value of these funds can rise and fall.
Provider?
Investment funds and brokerages, Bank Subsidiaries.
Allowance for the year: £20,000
Lifetime Cash ISA/ Lifetime stocks and shares ISA
What is it?
A lifetime ISA can severe several purposes; retirement savings, investment towards a house deposit or for first-time buyers.You can have either a Help to Buy ISA or a Lifetime ISA to buy your first home. These ISAs offer 25% bonus paid on top of your contributions up to £4,000.
Provider ?
Lifetime Cash ISA - Banks and building societies
Lifetime stocks and shares ISA - Investment funds and brokerages, Bank Subsidiaries.
Allowance for the year: £4,000 (part of your total £20,000 annual limit)
Innovation Finance ISA
What is it?
An Innovation ISA works through peer-to-peer lending. This incorporates people who are willing to lend and people who are borrowing. This type of ISA offers higher interest rates because it cuts out banks.
Provider?
Peer to peer lending companies
Allowance for the year: £20,000
HELP TO BUY ISA
What is it?
A savings account designed to help first-time buyers
Provider?
Banks and building societies
Allowance for the year: £3,400 (part of your total £20,000 annual limit)
This ISAs offers a 25% bonus paid on top of your contributions up to a maximum of £3,400
Junior Cash ISA / Junior stocks and shares isa
What is it?
A savings account or investment account for fewer than 18-year-olds.
Provider ?
Junior Stocks and Shares ISA Investment funds and brokerages, bank subsidiaries.
Allowance for the year: £4,368
Please note: All allowances are based on the 2019-2020-tax year.
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