ISAs can sound complicated to savers, but simply put, an ISA is a tax-free account for your savings – and from April of this year you will be able to save £20,000 a year in an ISA.
What is a Cash ISA?
A Cash ISA (Individual Savings Account) works in a similar way to an ordinary savings account in that you can put money in, take money out (sometimes there are withdrawal limits) and you earn interest on the money invested - however, you do not pay tax on the interest you earn and there is an annual limit on how much you can invest.
You must be a UK resident and aged 16 or over to get an ISA, although Junior ISAs are available for younger children.
The amount you can invest will rise in April of this year; from the current £15,240 a year to £20,000 a year - meaning savers can now invest more money in this tax-free savings option.
Every year you can invest your funds up to April 5 – any money invested after this date will move into the following tax year’s limit.
You can invest the maximum amount every year – e.g. if you invested £15,240 in an ISA from April 6 2016 to April 5 2017 tax year then you can invest an additional £20,000 between April 6 2017 and April 5 2018.
There are other types of ISAs available including Help to Buy and Lifetime ISAs and there are different rules for these, e.g. you cannot open a new Help To Buy ISA every year, and you may be able to split your ISA allowance between a Cash ISA and a Lifetime ISA – it’s best to speak to your ISA provider if you have questions around these ISAs. You can visit the Government website for more information on ISAs: https://www.gov.uk/individual-savings-accounts.
How does the Personal Savings Allowance affect an ISA?
ISAs are in addition to the new Personal Savings Allowance (PSA), which came into effect in April 2016. All basic rate taxpayers can now earn £1,000 of savings interest a year without having to pay tax on it. If you’re a higher rate taxpayer you’re entitled to a lower PSA of £500 a year.
Interest from ISAs does not count towards your personal savings allowance because it is already tax-free, but the personal allowance applies to any interest paid from bank accounts, building societies, credit unions and National Savings and Investments, as well as interest from annuity payments and other savings and investment trusts which pay interest.
You still have time to invest in an ISA for 2016 – the deadline is April 5 – find out more about our ISAs here or call a friendly member of our team on 0800 783 2367.