The Individual Savings Account (ISA) was first introduced back in April 1999, meaning that this year marks its 20th anniversary.
Online investment broker, Hargreaves Lansdown, estimates that approximately £8.7trn has been invested in the tax-free accounts during that time.
ISA’s can be a flexible way to save and invest whilst enjoying significant tax benefits, especially for higher earners and the range of investment options has evolved drastically since 1999. However, as ISA’s have evolved, many also feel that they have become increasingly complex and difficult to get to grips with.
Wherever you look for information on ISA’s, you’ll likely come across strong arguments for and against investing in them; some will perhaps even tell you that the ISA is dead!
The truth is though, that they are very much still alive and kicking. Whilst this is the case, it’s worth considering whether there might be reasons that an ISA is right for you.
Whilst you mull that over – here are 5 things we think you should know about ISA’s:
1 – Back to basics
When it comes to ISA’s, it’s all too easy to forget the basics. An ISA is a type of savings account. You can earn interest, dividends and capital gains from an ISA without ever being taxed.
The maximum amount you can save into an ISA for the 2018-19 tax year is £20,000. This limit is enforced by the UK government and is likely to remain for at least the next two years.
This means that, annually, you can protect up to £20,000 of your savings in a ‘tax-free wrapper’. There are several different ISA products available on the market and you can choose to split your annual contribution between these, in whatever proportion you’d like.
However, you can only contribute to one of each type of ISA, in each tax year.
Each year, there is a deadline by which you should have utilised as much of your allowance as possible; the 5 April, which also marks the end of the tax year. On the 6 April, your £20,000 ISA allowance will refresh.
2 – ISA allowance: Use it or lose it
If you have an ISA, it’s important to remember that any allowance remaining at 5 April 2019 will be lost. You cannot carry over your unused allowance from year to year, so you should always look to use up as much of it as you can before the end of the tax year. When it’s gone, it’s gone!
3 – Brexit, bank rates and the PSA
Benjamin Franklin once said, “nothing in life is certain, except death and taxes” and to some degree, he’s right. With Brexit on the horizon, threatening an economic slowdown, and the potential for taxes and bank rates to increases, ISA’s could be a safe bet amidst major change.
When we consider the dip in the number of people opting to save into an ISA, in recent years, the Personal Savings Allowance (PSA) is often identified as the reason for this.
The PSA, which came into effect on 6 April 2016, means that basic-rate taxpayers can now earn up to £1,000 in savings income tax-free. Higher-rate taxpayers can earn £500.
Ultimately, many people realised that they could opt for a non-ISA savings account, avoiding the relatively low interest rates, but still benefit.
However, the key thing to remember here is that there is no telling what will happen to the personal savings allowance and how long it will last. As for ISA’s, they will likely always be tax-free, and the rules are less vulnerable to change.
4 – The best time to invest
Around this time each year, along with many other accountants and financial advisers, we begin to encourage our clients to think about end-of-year tax planning and, as part of this, using up any remaining ISA allowance.
However, that isn’t to say that final few days of March is the best time to top-up your ISA or quickly deposit that £20,000 you’ve been sitting on.
If on the 6 April 2019, you have £20,000 ready to deposit… do it. If you sit on it or keep it in another non-ISA account until later in the year, then you’re effectively paying tax on your savings when you needn’t.
If you don’t have £20,000 ready to deposit in April, move over what you can and top it up throughout the year.
5 – Instant access or fixed-rate?
If you’re considering an ISA, know the difference between instant access and fixed-rate.
- Fixed rate ISAs lock your money away for a set period but tend to pay marginally higher rates of interest. If you later decide to take money out, you’ll pay an Early Access Charge. These are better if you have a lump sum to invest.
- Instant access ISAs let you access your savings throughout the tax year. You can also contribute as you earn. Interest is not fixed though, so if rates fall so may your returns.
6 – Pick of the bunch
Do your research before you jump in and invest all your hard-earned cash in an ISA. There are a range of investment options available, but not all of them will be the right fit for you. ISA’s currently on the market include the;
- cash ISA;
- stocks and shares ISA;
- Innovative Finance ISA;
- Lifetime ISA;
- Help-to-Buy ISA; and
- Junior ISA.
Each is accompanied by its own set of rules and so you should familiarise yourself with these before you decide where best to house your money.
7 – Is it worth it?
Though ISA’s certainly have their drawbacks and could do with some improvement going forward, they can still afford significant tax benefits.
When it comes to your savings and investments, it’s often not wise to put all your eggs in one basket. An ISA could be one of several investments for you, but one that guarantees £20,000 of your money will be safely set aside, tax-free, until you require access to it.
It is worth bearing in mind that ISA’s are often more beneficial for higher-earners. In particular, those who are likely to exceed the PSA limit or are nearing becoming additional rate taxpayers, and so won’t get a PSA.
Regardless, though, if you are keen to maximise your opportunity to save ‘tax-free’, then ISA’s certainly remain a valid option.
If you’re currently looking to start a rainy-day reserve, ISA’s should still be a consideration. You may just need to work a little harder to find the right account, with a reasonable interest rate. Contact us today for advice on how to secure the most tax-efficient home for your hard-earned money.
You can also read more about the tax-break on inherited ISA’s that thousands of people are missing out on, here.
