**Disclaimer: views given are solely mine. I am not a financial advisor and therefore, I am not able to provide financial advice. Please ensure you seek independent financial advice and conduct any necessary research. Relying on my views is entirely at your discretion.
Sorry to hit you guys with a disclaimer first – these things have to be done 🙂
A few weeks ago, I had a whole discussion about Individual Savings Accounts (ISAs) and maximising cash allowances on Instagram (PS: are you following me @naomisparlour?) and I was surprised by the number of questions I got. So I thought, “Why not write a blog post about it?”
“An investment in knowledge pays the best interest.”
– Benjamin Franklin
What is an ISA?
An ISA is a tax-free saving or investment account. It was introduced by the government in April 1999. By tax-free, it means you do not pay tax on any interest you earn.
Every tax year (which runs from April 6–April 5), the government sets a maximum savings threshold. The 2020/21 ISA allowance is £20,000.
Are there different types of ISAs?
There are four types of ISAs:
- Cash ISA (Help-to-Buy ISA and Junior ISA fall under this category)
- Stocks and Shares ISA
- Innovative Finance ISA
- Lifetime ISA
You get to choose how you want to split the £20,000 allowance across the different types of ISAs. 🙂 Any unused allowance does not roll over—so if you don’t use it, you lose it!
Who can open an ISA?
You need to be a UK resident aged 16 or over to open a Cash ISA; aged 18 or over to open a Stocks & Shares ISA or Innovative Finance ISA; or aged between 18 & 39 to open a Lifetime ISA. Note that you cannot open an ISA account with someone else or on behalf of someone else, except you are opening a Junior ISA.
Some banks may have additional requirements—make sure you read the small print. Now that I’ve given you a brief summary, let’s get into more detail about some of the ISAs.
A child who is under 18 and living in the UK is eligible for a Junior ISA. The Junior ISA allowance for 2020/21 is £9,000. It is aimed at encouraging families to save for their children’s futures. Only parents or a guardian with parental responsibility can open a Junior ISA for under-16s. Any money you save in a Junior ISA will be locked away until the child’s 18th birthday, after which it will automatically roll into an adult cash ISA.
The Help-to-Buy ISA was launched to help people who are saving towards their first home. Help-to-Buy ISAs was discontinued on November 30, 2019; however, if you opened your Help-to-Buy ISA before that date, you can keep saving into your account and earn a government bonus towards your first home.
Stocks & Shares ISA
Unlike cash ISA which is basically a savings account you do not pay tax on, with a Stocks & Shares ISA, you’re investing. Any profits earned from a Stocks and Shares ISA are tax-free. You might be interested in a Stock & Shares ISA if you are looking to lock away your money for a few years.
WARNING: When you invest in the stock market, the value of your investments can rise or fall.
Innovative Finance ISA
Innovative Finance ISAs are deemed to be riskier than Stocks & Shares ISAs. This is because your money is invested in things like Peer-to-Peer lending. As with other ISAs, the interest you earn from lending your money isn’t taxed.
How Peer-to-Peer lending works: you lend your money to borrowers in return for interest. This is usually based on the length of time you are prepared to leave your money untouched.
Why is an Innovative Finance ISA riskier? This is because there is always a chance that the borrower will not repay the loan, which means you lose money. However, you can reduce this risk by spreading the amount you are willing to lend across multiple borrowers.
Lifetime ISA (LISA)
This is another ISA that was created to help people saving for their first home or saving towards retirement. Even though the yearly ISA allowance is £20,000, the maximum you can pay into a LISA is £4,000 every tax year.
This means if you max out the £4,000 on a LISA, you will only have £16,000 available to spread across the other ISAs.
How LISA works: the government will give you 25% of whatever you save. For example, if you save the maximum amount of £4,000, you will receive £1,000 back from the government. You will be paid this bonus until you’re 50 years old. *Yup, it’s that easy*
Because LISAs were created specifically for first-time homebuyers or retirement, you will be charged a penalty if you try to withdraw funds for any reason except the below:
- you are about to buy your first home;
- you have reached the age of 60 or
- you are diagnosed with a terminal illness
1. Can I open more than one ISA in a tax year
You can have multiple ISAs, but you can open only one cash ISA in each tax year. So, if you have opened a cash ISA since April 6 2020, you cannot open another one until April 6 2021.
2. I have too many ISAs open from previous years; how do I keep track?
You can transfer ISAs from a previous tax year into a new tax year; this will not affect your allowance. For example, if you saved £10,000 in the 2019/20 tax year, you can transfer that into an ISA in the 2020/21 tax year and still have your threshold of £20,000. Make sure to tell your ISA provider that you want to use the transfer option.
DO NOT WITHDRAW THE MONEY YOURSELF OR YOU WILL LOSE THE TAX BENEFITS.
3. Can I open a joint ISA with my partner?
No – everyone is entitled to their own ISA account.
I tried not to make this post too long. If you have any questions regarding ISAs, please leave a comment or send a direct message to me on Instagram – @naomisparlour
*For tax purposes, you’re automatically a UK resident if either:
- you spent 183 or more days in the UK in the tax year
- your only home was in the UK—you must have owned, rented or lived in it for at least 91 days in total—and you spent at least 30 days there in the tax year (culled first from the gov.co.uk website).
*All posts on Naomi’s Parlour are edited by Ife Agboola.