What is an ISA?
The government offers generous tax breaks to encourage you to save, and one of the most popular and accessible is an ISA. An ISA, or Individual Savings Account, is not an investment in its own right. The best way to think of an ISA is as a ‘wrapper’ in which you can shelter your savings and investments from tax.
What you need to know about ISAs:
- Within a Stocks & Shares ISA you pay no capital gains tax and no further tax on any income.
- You don’t need to declare ISAs on your tax return.
- Any UK resident aged 18 or over (16 for Cash ISAs) can invest. There is no upper age limit and you can withdraw your tax-efficient savings whenever you need.
- The amount you can invest into an ISA each tax year is decided by the government, this tax year the allowance is £20,000.
- In many cases, it costs no more to hold cash and investments inside an ISA than to hold them outside so investors can receive these benefits for free.
- Used regularly, your annual ISA allowance offers you the chance to create a substantial portfolio sheltered from the taxman.
In fact, for those with the money to spare, we believe there is little reason not to open an ISA.
Please remember however, tax rules change over time and the benefit of sheltering your investments from tax will depend on your circumstances.
Cash ISAs versus Stocks & Shares ISAs
Cash ISAs operate just like a normal savings account except the interest is tax-free. This means they can be great for short term savings because your capital is guaranteed (up to £85,000 with each bank or building society) and you can access it whenever you need.
Stock market investments, by contrast, can fall in value as well as rise so you could get back less than you invest. Over the longer term they can deliver significantly higher returns but they are higher risk. Therefore, once sufficient cash has been set aside to cover any short-term needs, we suggest investors consider investing in a Stocks & Shares ISA if they are comfortable with the risks.
The value of investments can go down as well as up and you may get back less than the amount invested. Past performance is not a guide to future performance.