Have you ever wondered what an ISA is? Well, you’re not alone! Many people often wonder what an ISA can do for them, but usually feel too afraid to ask at the risk of sounding stupid. This guide is going to lay down what an ISA is to you in simple terms, so you can fully understand whether one would be suitable for you (and we aren’t going to judge you for not knowing what an ISA is either)! Let’s get started so you can start making the most of your money:
What is an ISA?
If you pay tax, then a cash ISA can be a good choice for your savings. Why? Because interest earned on a cash ISA is totally tax free (wahoo!), the opposite to a normal savings account where you are taxed on any interest you earn (boo!). There are more advantages of ISA’s too.
ISA stands for ‘individual savings account’, and is basically an account that pays interest to you tax free, as opposed to a savings account that you’d have to pay tax on like fixed rate bonds and other options.
When it comes to features, there isn’t a huge different between an ISA and a regular savings account, although they will vary from bank to bank. The big difference is the amount you can pay into your ISA. You will have a limited maximum allowance set in any tax year that you won’t be able to exceed.
Every tax year you’ll get a new ISA allowance. In the year 2014-2015 for example, the allowance is £11,880 of which no more than £5,940 can be saved in a cash ISA. This is set to change in July however, so keep an eye out. The government want to make ISA’s easier to understand, so they are launching something called a NISA or ‘new ISA’. The overall investment limit is supposed to be £15,000 which can be held in cash or stocks/shares in a combo of your choice.
All UK residents over 16 have the same allowance, but adults aged 16-17 have an additional limit of £3,840, or £4000 from July. They can’t invest in an adult stocks and shares ISA until they are 18.
Let’s take a look at your options:
£11,880 invested entirely in a stocks/shares ISA. You don’t have to put any of the allowance into a cash ISA.
£5940 invested in a cash ISA. You don’t have to put any of your allowance into a stocks/shares ISA.
£5940 invested in a cash ISA with the rest of the £11,880 invested in a stocks/shares ISA.
Ultimately, you should choose the option that suits you best and has the most benefits!
You can make withdrawals from your cash ISA, but you are unable to replace the money until the new tax year begins. This means you need to be careful when withdrawing your cash or you could miss out!
Do you better understand ISA’s now? Let us know in the comments!