Individual Savings Accounts also known as ISA’s are a great way of saving and minimising the amount of tax you have to pay on your investment returns.

In this podcast episode, I talk about the different kinds of ISAs available, how they work and how you can benefit by including them in your Investment Portfolio.

If you would prefer to read about it, there’s also a transcript below.

Transcript

This week, we are going to take a look at individual savings accounts, which is a great way of saving and minimizing the amount of tax you pay on your investment returns.

Individual savings accounts are a tax efficient wrapper enabling you to minimize the amount of tax you pay on your investment returns.

Some individual savings accounts or ISA’s give you instant access to your money and can be used to plan your finances for the short term. On the other hand, if you have a longer term savings goal you can invest in an ISA for the future.

In the current tax year, 2022/23 you can put £20,000 into a tax efficient ISA before the end of the financial year on the 5th of April. The current tax year started on the 6th of April 2022 and ends on the 5th of April 2023.

So let’s look at the ISA options:

Cash ISA

The first is the Cash ISA.

If you are a UK resident over the age of 18 you can open up one of each type of ISA in a tax year, providing you don’t exceed the Annual allowance.

Cash ISAs are suitable for your short-term savings goals, as they don’t invest in the stock market. But with current low interest rates, your savings won’t grow a great deal and you may not be keeping up with inflation.

You might consider a cash ISA as your emergency part of money for any unexpected expenses or a last minute holiday.

If you are over 16, but under 18, you can only open up a cash ISA.

ISA tax year investment levels 2022-23

Stocks and Shares ISA

There’s also a stocks and shares ISA.

This is a tax efficient investment that allows you to invest your money in shares, Government bonds (which is gilts), and property, with peace of mind that you wouldn’t pay any capital gains tax or income tax on the proceeds. This type of ISA is more suitable for your longer term goals, as it has the potential to out perform Cash ISAs over the medium to long term, but with varying levels of risk.

The main factors to consider when choosing between a cash ISA and a stocks & Shares ISA are the length of time you’d be saving or investing, including your appetite for investment risk and the impact of inflation over time.

Innovative Finance ISA

Another type of ISA is the innovative finance ISA.

Not many people have heard of this one. But this is a type of investment account that allows you to lend your money through peer to peer lending platforms to receive tax efficient interest and capital gains. You could be lending money to serve personal loans, small business loans, or property loans, or a combination of all of these.

Interest rates can often be much more attractive than cash ISA rates, but peer to peer lending is a higher risk form of investing. And your capital is entirely at risk as there is no protection from the financial services compensation scheme.

Lifetime ISA

If you are aged 18 to 39, and you’re looking to save for your first home or for later life, you could consider lifetime ISA.

You could hold cash in a Lifetime ISA or choose to invest it just as you would with a stocks and shares ISA. You can put in up to £4,000 each year, up to and including the day before your 50th birthday. But remember that this £4,000 allowance contributes towards your full ISA Allowance. The Government will pay 25% bonus on your contributions. That is, £1 for every £4 that you put in, up to maximum of £1000 a year.

But you must be aware that a charge of 25% will be applied to any withdrawal, if it is for any reason, other than buying your first home, or at age 60, or if you are terminally ill.

The amount you pay in is linked to your annual ISA allowance, which is £20,000 for the current tax year. And for example, if you pay £1,000 into your Lifetime ISA, you can still pay £19,000 into other ISA products.

Junior ISA

And lastly we have the Junior ISA

This is a cash, or a stocks and shares ISA, or both can be opened for a child and subject to the annual allowance, which is £9,000 for the current tax year. The account must be opened by the child’s parent or guardian, but anyone can contribute once the account has been opened.

Savings in a Junior ISA account cannot be withdrawn until the child reaches age 18.

So just to sum up, ISAs can be a great way of saving money very tax efficiently.

And in the main you can invest in stocks and shares, or you can simply keep the money in cash.

If you would like to help maximising your tax efficiency and investment returns, get started with a free 30 minute call:

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