UK taxpayers can put up to £20,000 a year each into ISAs, either into a cash ISA where the gain is largely dependent on interest rates (currently higher than they were, but looking like they will continue to fall gradually over the coming months), or into a stocks and shares-based ISA – or a blend of both.
A surprising number of people view that £20,000 as the absolute limit you can put into ISAs, but it is important to point out that that allowance renews every tax year, and is per person – so a couple could put £40,000 between them into ISAs on 31st March and another £40,000 a week later when the new tax year starts.
What to do, though if you have a much higher sum to invest? Clearly you will want to maximise your existing ISA allowance opportunity immediately. One option could be to put the rest into an onshore investment bond, which allows you to withdraw up to 5% each year tax deferred – it is regarded as returned capital. That could then allow you to use those withdrawn funds to take advantage of your ISA allowance in subsequent years.
Let’s not forget that a couple could invest as much as £200,000 into ISAs in just five years, providing a significant opportunity to earn growth that is entirely free of tax. And that is why it is important to regard ISAs not as a one-off way of sheltering your savings from tax, but an ongoing opportunity to maximise your investments.
ISAs – a quick guide
Cash ISA
The growth in these is based on the interest rate payable. They can be Easy Access Cash ISAs, where you can access your money when you need it, and where the interest rate paid is usually variable, so can both go up and down; or Fixed Rate Cash ISAs, where you commit to leaving your money for a fixed term, with a guaranteed rate of interest.
Stocks and Shares ISA
As the name suggests, the ISA here is essentially a tax-free wrapper for a stocks and/or shares based investment. No tax is payable either on capital growth or on income from dividends and interest. As with any stocks and shares based investment, the capital value of the investment can go down as well as up. Stocks and shares held in an ISA can include shares in companies, unit trusts and investment funds, corporate bonds and government bonds.
Lifetime ISA
If you are between the ages of 18 and 39, you can put up to £4,000 of your annual ISA allowance into a Lifetime ISA, the advantage being that the government pays a 25% bonus on your investment (so up to £1,000 a year. The investment can be in cash or stocks and shares. Lifetime ISAs are particularly appropriate for those saving to buy their first home.
Innovative Finance ISA
This is a niche product allowing you to invest tax-free in peer-to-peer loans (where you lend to other people or businesses without using a bank) and crowdfunding debentures, when you invest in a businesses by buying its debt. Importantly, the Financial Services Compensation Scheme (FSCS) doesn’t cover such investments, so if whoever you have lent to goes bust, you may lose everything.
Junior ISA
Parents, grandparents and guardians can open a Junior Isa (cash or stocks and shares) and pay up to £9,000 a year into it – this is in addition to their own £20,000 ISA allowance. When the child turns 18 the Junior ISA automatically turns into an ISA, and they can decide whether to keep the money invested or start withdrawing it.