Individual Savings Accounts, better known as ISAs have been part of the UK’s financial landscape for almost 20 years. Introduced in 1999 to cut down on the acronyms by replacing PEPs and TESSAs, they have become the go-to product for private individuals who are in a position to put a little by for a rainy day.
So far so good, that much we all conceptually know. But what sort of ISAs are actually available, and is there a limit on what you can save? If your answer to that is a vague “several” and “I think so,” you are not alone. Let’s cut to the chase and demystify ISAs once and for all.
An ISA is a tax-free savings or investment account. Traditionally, ISAs have been offered by high street banks and building societies, but you can also sign up for one via asset management firms and even insurers. These days, you don’t even have to step outside your front door, as Wealthify ISAs are available online at the click of a mouse.
Different types of ISA
There are a number of different ISA products. The most common is the basic cash ISA. This behaves in much the same way as a savings account, in that you put money in and it accumulates interest. The difference is, there is no tax to pay. The other similarity with savings accounts is that you can get different interest rates depending on how and when you want to access your money. Instant access ISAs offer the convenience of being able to put money in and take it out whenever you like, while a fixed rate cash ISA offers a higher interest rate but requires you to make a minimum deposit and leave it untouched for a set time period.
Another type is the stocks and shares ISA. This operates in the same way as a basic investment fund, and gives you the flexibility to invest your wealth in managed trusts, investment funds and the like. Again, there is no tax payable on your interest, dividends or capital gains.
There are also Junior ISAs that are aimed specifically at under 18s.
What are the limits?
An ISA makes perfect sense for anyone with money to save or invest, as the tax breaks will mean a better return than conventional investment funds or savings accounts. Obviously there is some catch, or everyone would simply have all their wealth tied up in ISAs, and this is that there is a limit per person. In the autumn budget, Philip Hammond confirmed that this would remain at £20,000 for adults and would rise to £4.368 for juniors.
This allowance can be split across multiple ISAs as you see fit. So if you have £8,000 in a cash ISA, that leaves you up to £12,000 to put into an investment ISA, for example. If you accidentally go over the limit, don’t panic. You will simply need to pay tax on the excess amount. HMRC will soon spot it, but it always makes sense to be proactive and report the mix up via the ISA helpline.