ISA accounts and tax: What you need to know in the UK

ISA accounts and tax: What you need to know in the UK
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The ISA is an exceptional kind of bank account—there are various types—cash and stocks, and shares. 

In a cash ISA, you get tax-free interest on your savings; in a stocks and shares ISA, you don’t get any tax relief on earnings from the investments. With both types of ISAs, it means that whatever money (up to certain limits) you pay goes tax-free.

An older type of ISA is called AISPs. These were phased out on 6th April 2011; however, if you already had one on this date, then it will carry on as usual until your investment matures (reaches its end).

What is an ISA?

An ISA is an ‘Individual Savings Account’. It is a particular type of bank account where you can put money in to earn interest but not pay tax on it.

You can have more than one ISA. For instance, having multiple accounts would help keep each type separate if you wanted to save up for different things. You can also transfer old cash AISPs over into the new style cash ISSA very quickly (more information via GOV.UK).                            

Your age or circumstances determine the most you may put in an Individual Savings Account (ISA) each year.

What kind of ISAs are there?

There are two types of ISA – cash and stocks and shares.  

Cash ISAs

This type gives you a rate of interest that excludes any income tax or capital gains tax.

So if your savings grow at 5%, then this rate will remain at 5% after taxes have been deducted from it – not bad. The only downside with this type is that you cannot take out your original investment until the end of the account’s life.

Stocks and shares ISAs

It is a stock/bond account to invest in firms like Tesco or Apple or government-backed projects like the Channel Tunnel rail link. 

This type of ISA gives you several tax benefits. 

You will not be taxed on any interest earned, and you won’t have to pay capital gains tax when you sell your investment after it has finished its existence.

Each of these kinds also has a junior version which you can open for your children under 18-years-old. 

They operate in the same way as their adult counterparts, with one exception: they don’t have to pay income tax on the interest earned. 

In both cases, any money you put in is locked away until it matures.

When should I use an ISA?

You want to keep them safe from taxes whenever you have extra savings while allowing them to grow at a decent rate. Or, if you’re saving up for something specific, then a cash ISA would be better suited since there’s no risk involved. 

Keep in mind that you won’t get the original investment back until the end of the account’s life.

How long do you want to keep your money in the bank? 

If it’s only going to be a few years before you’ll use them, then it would probably be better to go with a cash ISA since they are usually easier to get your hands on when you need them. 

But if you want to keep the money in for a much more extended period – e.g. for buying a house down-payment or funding your retirement. 

It might then be worth looking at stocks and shares ISAs since there is no limit on how long you can leave the money untouched.

Tax allowances

The last thing people should consider when choosing between ISAs is their tax allowances. 

If you’re only allowed one ISA per tax year – whether that’s because you have reached your annual allowance or are married to someone who has done so – then you may not benefit from having both types of account open, even if you do.

Read more about ISA account here.

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