Making sure you pick the right ISA for this tax year is as important as ever!

Consideration

When considering an ISA, a key point to remember is that ISAs are not investments themselves but wrappers that allow investments to be made tax-free.
Investing in an ISA can shelter the proceeds from capital gains and income tax.

Failure to distinguish between the wrapper and the investment causes new investors to be very confused about ISAs.

If the two things are seen as separate-although-related, it is much easier to understand how they work.

What is an ISA

When someone puts money into an ISA, they do two things at once. They invest in some financial asset and use a wrapper to protect it from the taxman.

So, any investments made within the ISA are subject to various annual allowances and are tax-free.

For example, an investor who wanted to put money into assets that paid out income could legally avoid tax on that income. Any investments made within the ISA wrapper would not need to be declared to the taxman.

It is, therefore, just as important to understand the differences between the various types of ISA that currently exist to help you decide which is best for you:

CASH ISA:

  • You must be 18 or older and a UK resident for tax purposes. You will earn tax-free interest on your cash savings; the maximum contribution is £20,000 for the tax year 2024/25 and will remain the same for the tax year 2025/26.
  • There is no limit on the number of Cash ISA s you can open annually, and you can transfer to another Cash ISA or a Stocks and Shares ISA with another provider during the tax year.
  • You can also combine Cash & Stocks & Shares within your allowance.
  • Viewed as low risk and safe, usually taken out with a Bank or Building Society and having no investment risk.
  • BENEFIT: Suitable place to hold cash on deposit, safe & secure.
  • BE AWARE: Cash interest rates are currently very low.

 

JUNIOR ISA:

  • Set up by Parents or Guardians, and the child must be under 18.
  • You will earn tax-free growth.
  • Parents, Guardians and Grandparents can pay in.
  • Contribute up to £9000 annually into Cash or Stocks & Shares.
  • Children can have control at age 16, but cannot access it until age 18.
  • BENEFIT: Excellent way of setting up long-term tax-free savings for children. Read more about how to make the most of a Junior ISA.
  • BE AWARE: Child has access at age 18 and control over how money is spent.

 

LIFETIME ISA

  • You must be over 18 and under 40 years old.
  • You will earn tax-free growth, and it can be either cash or stocks & shares.
  • Maximum contribution of £4000 per year and funding stops at age 50.
  • The Government will add a 25% bonus up to a maximum of £1000 per year.
  • Initially set up for first-time buyers to save for a deposit.
  • Cannot access until age 60 unless for FTB purchase.
  • BENEFIT: Great way to save for house deposit with Government bonus or complement existing retirement plans
  • BE AWARE: You must stop funding at age 50, and the Government bonus will also stop.

 

STOCKS & SHARES ISA

  • You must be aged 18 or over and a UK resident for tax purposes.
  • You will earn tax-free growth on your investment, with a maximum contribution of £20,000 for 2024/25.
  • You will have a choice of which funds to invest in, including environmentally friendly and sustainable funds, and you can choose your level of risk.
  • You can invest for growth, income, or a combination of both.
  • You can pay regular premiums, lump sums, or both.
  • BENEFIT: This is a Great way to invest medium to long term and gain tax-free growth and income to supplement pension savings and draw income from.
  • BE AWARE: The Value of stocks & shares can fall and rise.

 

One of the best ways to review your existing ISAs or to invest for the first time is to consult an Independent Financial Adviser. They can examine the whole market to ensure you get the right balance between cash and risk and reward and choose the right type of ISA for you.

Read more about savings at money helper.org.uk

Investment values can go up or down, and you could get back less than you invest.

If you are in any doubt about the suitability of a Stocks & Shares ISA, you should seek independent financial advice.

The tax treatment of this product depends on your circumstances and may change in the future. If you are uncertain about the product’s tax treatment, you should contact HMRC or seek independent tax advice.