July 24, 2014

ISA

What is an ISA?

An ISA allows you to shelter your savings and investments from the ‘tax man’. First introduced in April 1999, ISAs essentially are the Goverment’s way of encouraging you to save. Each tax year (April to April), you are allocated an ISA allowance in which you can invest into a cash ISA, stocks and shares ISA or even a mixture of both.

How old do I have to be to have an ISA?

Everyone over the age of 16 can take advantage of a cash ISA, while those over 18 can also take advantage of a stock and shares ISA.

How much can I invest in an ISA?

The current ISA allowance per tax year (April to April) is £10,680. However, a maximum of £5,340 (50% of the total ISA allownce) can be invested in a cash ISA or the full £10,680 can be invested into a stocks and shares ISA. Alternatively, it is also possible to combine both ISA options within the total ISA allowance.

For example, you may invest 40% of the yearly ISA allowance (£4272) into a cash ISA and the remaining 60% into a Stocks and Shares ISA (£6480). The key thing to remember is that you cannot invest more than £5340 into a cash ISA per tax year.

What’s the difference between a cash ISA, stocks and shares ISA?

  • Cash ISA: These are savings accounts where interest accrued is not taxed. In contrast, a normal savings account will see you pay tax on your interest. More detailed information on a cash ISA can be found here.
  • Stocks and Shares ISA: These provide an opportunity to hold shares or investment vehicles such as unit or investment trusts within an ISA. The big advantage is that any growth from investments held within this form of ISA are exempt from capital gains tax. Howver, the tax advantages do really depend on your personal tax status. More details on a Stocks and Shares ISA can be found here.

You’d be foolish not to take advantage of your YEARLY ISA allowance!

The benefit of sheltering your investments from the tax man are clear – greater financial rewards! Finances permitting, it makes sense to take full advantage of your ISA allowance each and every year. ISA millionaires are a perfect example of why you should always take advantage of your yearly ISA allownace. With a combination of dedication and the right investment choices, ISA millionares have clearly enjoyed the benefits of compounded yearly benefits.

And don’t forget, the Junior ISA is coming too…

Replacing the Child Trust Fund, November 1st 2011 will see the introduction of Junior ISAs. Similar to ‘adult’ ISAs, Junior ISAs will allow for tax free efficient savings and investments for children. The money is ‘locked away’ until the child reaches 18, a perfect time to help pay for things like University education. More details can be found here.