An ISA or individual savings account is a UK government regulated way to save money. Money put into an ISA will not be taxed on any growth it receives whilst inside the account and can even be withdrawn without penalty (although this does require prior notice).
The purpose of an ISA is primarily for long term investments, although many banks do offer more accessible access models which allow for regular income/withdrawals. However, both types of accounts are designed primarily for saving.
Tax-efficient investing has always been popular in the UK; one major reason why capital gains tax has existed since 1965. Initially, this tax was set at 40%, but the current 20% rate was first applied in 2001. It is, however, worth noting that this rate also applies to dividend income, which has been taxed at the same rate since 1979.
George Osborne changed the ISA allowance after he came into power in 2010. The new system allows for either £15,000 or £20,000 per year depending on which you earn more (this refers to gross income rather than taxable income). This change was implemented to make the ISA system fairer as people earning less would have previously had a larger allowance relative to those who earned more.
Benefits of an ISA account in the UK
One option for savers who want long-term protection from inflation and quick access to their savings if they ever need them is an ISA account.
With interest rates dropping across the board following Brexit, saving as much money as possible has never been more important. By using a cash ISA, savers can reduce the tax they pay on their hard-earned income – bringing even more money back into their pockets each year.
Not only does a cash ISA allow you to stash away cash in a low-risk investment, but particular types of ISA let you save for things like your first house or retirement. By taking advantage of these savings options, savers can expand their wealth and enjoy the rewards when they come to collect.
ISAs provide easy access to people’s money should they ever need it – making them an ideal part of any financial plan. They also give people the chance to invest in higher interest-paying accounts than current standard accounts, allowing them to expand their savings even further. However, it is essential to remember that if money is withdrawn before the end of the tax year, this could trigger extra taxes, which could outweigh any potential benefit of an ISA.
It should be noted that there are some other caveats surrounding tax allowances and what they refer to. For example, married couples can pool their allowances together if one has no income, but if they are to be split, this requires prior notice. The only other major exception is Child Trust Funds (CFT’s), where yearly contributions cannot exceed £4000 per child until 18.
At present, however, ISA accounts continue to be one of the best ways for an individual to manage their money responsibly and tax efficiently. It should also be noted that any dividends you receive whilst holding your investment in an ISA do not count towards your annual allowance; they are covered separately under EIS/SEIS.
By taking advantage of an ISA account, not only can people save for their futures without worrying about losing money to taxes, but they can also save themselves valuable time filling out complicated forms, which would take up valuable free time.
An ISA account might seem like just another form to fill in, but it could potentially save thousands of pounds throughout a person’s lifetime. It is worth taking a look at what you can save by opening one up today, especially as it only takes a few minutes to open an online account with many high-street banks. New investors are advised to use a reputable online broker from Saxo Bank; for more information, follow this link.