ISA (Individual Saving Account)
Up until about 5 years ago ISAs seemed pretty straight forward. There were 2 options (as far as I’m aware), there was either a Cash ISA, which your local bank or building society would offer or a Stocks and Shares ISA, which would be offered by brokerages. However, over the last 5 years it appears these ISAs have multiplied like rabbits and now it feels like untangling a bowl full of spaghetti when attempting to figure out which ISA right for what job.
Well if the conundrum of which ISA to open or contribute to this tax year has been keeping you up at night (and I’m taking a wild guess that it probably hasn’t), then don’t worry, we’ll go over what is currently available and when which ISA is best for what job. Now come on, together, we’ll get through this.
At the moment it’s simple, any gains on the money within an ISA (sometimes also referred to as a tax-wrapper, this isn’t someone who raps about tax) are currently protected from the tax man. There are other advantages which we’ll go over in the table below.
|ISA Type||Restrictions||Best For||Yearly Limit||Benefits|
|Cash ISA||Building up cash savings.||20,000||Interest earned on savings is not taxed.|
|Lifetime ISA||Can only withdraw money for house purchase or retirement.
If using this for retirement savings, money cannot be withdrawn until age 60.
|Saving for a house or retirement.||4,000||Government tops up amount by 25%. So you put in £4,000 and the Government will add £1,000.
|Help to Buy ISA||Can only be used for buying your first home.||Saving for a house deposit.||
Maximum of £200 per month contributions.
In the first month of opening you can deposit £1,200.
|The Government will top up the ISA when the ISA is closed for purchasing a house. The government top up by 25% of what is in the ISA up to a maximum of £3,000.|
|Stocks and Shares ISA||Building up a shares/bonds/funds portfolio.||20,000||Any gains in value of shares or bonds are tax free. As are the dividends or interest which is paid to you.|
|Innovative Finance ISA||Peer-to-peer lending||20,000||The money earned from peer-to-peer lending is tax free.|
Scenario: Saving for a house
So you’ve got two options here, either the Lifetime ISA or the Help to Buy ISA, which is going to be best for you? Well you’re reading a HTSC post so we’ll get to the example.
- Saving for 3 years (36 months)
- Maximum contributions are made
|ISA Type||Contributions||Total Contributions||Bonus||Total|
|Help to Buy ISA||1,200 x 1 Month
200 x 35 Months
|Lifetime ISA||4000 each tax year||12,000||3,000||15,000|
If maximum contributions can be made, the Lifetime ISA is the one to go with and even if you cannot make the maximum, it’s still the Lifetime ISA and here’s why. The Lifetime ISA has an age limit of 50 for when the 25% bonus stops being paid, where as the Help to Buy ISA will only pay a maximum bonus of £3,000. So there’s no point in saving into the Help to Buy ISA once you’ve saved £12,000.
If you open a Lifetime ISA and contribute the same as you would have if you opened a Help to Buy ISA, the bonus and total will be the same. It’s just the Lifetime ISA allows you to save more and in turn earn a bigger top up.
Scenario: I’ve budgeted like a pro and I’m sat on spare cash I want to get to work
So you’re not happy with the Cash ISA return (of a pitiful 1%) and you’re happy to take on a little more excitement (read risk) in the hope of greater returns.
Now the Stocks and Shares ISA and the Innovative Finance ISA are not directly comparable as they are out there to satisfy different needs but here’s a quick rundown.
|Stocks and Shares ISA||Any gains in the value of shares and bonds bought is tax free.
Any dividends or interest paid is tax free.
|There is an ongoing fee for having a Stocks and Shares ISA.|
|Innovative Finance ISA||Any money received from peer-to-peer lending activities is tax free.||There is an ongoing fee for having an Innovative Finance ISA.
Not many platforms currently offer this ISA.
The Innovative Finance ISA is the new kid on the block and it’s out there to satisfy the growing demand of people wanting to loan out their spare cash to other people or businesses. This is known as peer-to-peer lending or crowd funding. More information can be found here: MoneySavingExport – Peer-to-peer lending
There are not a lot of platforms out there that offer the Innovative Finance ISA but one list I’ve found is: https://innovativefinanceisa.org.uk/isa-providers/
So I hope that clears a few bits and pieces up and you’re able to determine which ISA is best for you. I’m sure in years to come there will be even more ISA options out there, which will no doubt add to the confusion but don’t be afraid, as we’ll tackle each ISA as it is released into the wild.
As always, please do further reading when it comes to finance. The topic of ISAs is a large one and cannot be fully understood by reading one blog post by a guy on the internet. Happy hunting!