YOUR ISA OPTIONS
If you keep your money in a regular savings account, tax is applied to any interest that you earn. For basic rate tax payers 20% tax is applicable on the interest earned on savings over the allowance of £1000. This increases to 40% for higher rate tax payers and applies to savings over the allowance of just £500. For additional rate tax payers there is no allowance whatsoever and the rate of 45% is payable on all interest made on every penny of the savings in a regular savings account.
This is a problem which can easily be solved with an Individual Savings Account or ISA as they’re commonly referred to as.
Whats even better is the interest rates available on an ISA are generally much higher than on any type of regular savings account.
There are 5 types of ISA available:
IFISAs - INNOVATIVE FINANCE ISAS
The Innovative finance ISA works on a portfolio basis, via peer to peer lending and crowd funding platforms. Any money you invest into this form of ISA is then lent out to people, so it remains tax free. There is however an element of risk with this form of ISA, because you are lending the money to a third party there is always a possibility of the borrower defaulting. Mitigating this risk is done by spreading the investments over several funds and having safeguards in place. Obviously, the more risk you take, the higher the returns are, as per any other lending mechanism.
Cash ISAs are like a regular savings accounts but with one big difference. The interest earned on your savings is not subject to tax. What’s more, the interest earned doesn’t even count towards your personal allowance, so an ISA could well be the smartest way to save you money on your investments.
Similar to regular savings accounts, cash ISAs have many options available, they are instant access or regular savers and you don’t have to pay for opening a cash ISA.
Help to Buy ISAs
Help to buy ISAs were launched late in 2015. You can invest up to £1200 in month one, tax free and then pay in up to £200 a month after that. The funds are used when you buy your first home and you will gain a bonus of 25%, up to a cap of £3000, from the state into your savings.
This is done to help first time buyers get on to the property ladder, hence the name Help to Buy ISA.
LIFETIME ISAS - LISAS
Lifetime ISAs, also known as LISA were launched back in 2007. To open one you need to be aged between 18 and 40 and you can pay in up to a limit of £4000 a year until you’re 50. The government will add a bonus of up to 25% a year, so up to a maximum of £1000 per year.
You can hold cash or stocks and shares in your Lifetime ISA, or a combination of both and when you reach 50, even though you will not be able to pay in to the LISA or earn the 25% bonus, it will remain open and active and you will continue to earn interest and investment returns.
In order to open or pay into a Lifetime Individual Savings Account you must be a UK resident or a crown servant (so work in the diplomatic service or similar) or be their spouse or their civil partner.
STOCK AND SHARES ISAS
ISAs can also be used for investing in stocks and shares. You can invest in funds, bonds and shares of companies floated on the stock exchange.
Stocks and Shares ISAs are predominantly used as an online service and are often termed as fund supermarkets or fund management groups.
If you are curious about opening one you’ll need to be aware of all your options, some providers charge fees when you open, hold and sell stocks and shares ISAs and some may even charge for churning portfolio or moving it to another company.