Individual Savings Accounts (ISAs)

ISAs are tax favoured savings and investment accounts. You can use them to save cash or invest in stocks and shares. The maximum you can put in to an ISA is £11,880 in each tax year. Up to £5,940 of that allowance can be saved in cash while the remainder can be invested in stocks and shares.

You don't pay any Income Tax on the interest or dividends you receive from an ISA and any profits from investments are free of Capital Gains Tax. This does mean that you can't use losses on ISA investments to reduce Capital Gains Tax on profits from investments outside the ISA.

When the maximum allowance has been invested for one financial year, individuals are not able to invest any more even if a withdrawal has been made.

For example, a Cash ISA is opened and £2,000 is invested at the start of a financial year so the maximum amount that can be invested over the remainder of the year is £3,940. If a withdrawal of £500 is made halfway through the year, the maximum amount that can be invested is still £3,940 not £3,740. Providing no more withdrawals are made and the remaining maximum investment is made, the balance at the end of the year would be £5,940. The total amount of money invested into a Cash ISA each year is £5,940 regardless of the number of withdrawals made.

To open an ISA, individuals must be 18 years old or over however, an individual aged 16 and over is entitled to open a Cash ISA.

Individuals must be UK residents for tax purposes. People working abroad or Spouses and Civil Partners of individuals working abroad are also entitled to open an ISA.

ISAs cannot be held as joint accounts or on behalf of other individuals.

The different types of ISA

There are four types of ISAS:

1)      Stocks and Shares ISA

2)      Lifetime ISA

3)      Cash ISA

4)      Innovative Finance ISA

Ways to use your ISA allowance

Stocks & Shares ISA

Lifetime ISA
 
(18-40 yr-olds)

Cash ISA

Innovative Finance ISA

Total 2017/18 ISA allowance

Invest in a Stocks & Shares ISA only

£20,000

£0

£0

£0

£20,000

Invest in a Lifetime ISA only

£0

£4,000

£0

£0

 £20,000

Invest in a combination of ISA types

Split your allowance across ISA types however you choose, as long as the combined amount doesn't exceed £20,000 and you don't put more than £4000 in a Lifetime ISA.

£20,000

Invest in a Cash ISA only

£0

 £0

£20,000

£0

£20,000

Invest in an Innovative Finance ISA only

£0

 £0

£0

£20,000

£20,000

Cash ISA

The Cash ISA allows individuals to invest in Building Society deposits, UK and European authorised Bank deposits, cash unit trusts or National Savings. This is a good choice for short-term savings especially if individuals want to access their money easily. The Cash ISA allows individuals as young as 16 years to benefit from tax-free savings.

With Cash ISAs the return comprises the sum invested plus interest over the term.

Stocks and Shares ISA

The Stocks and Shares ISA allows individuals to invest in collective shares, for example, Unit Trusts, Investment Unit Trusts, shares listed on a recognised stock exchange, bonds and gilts and Life Assurance. The return on Stocks and Shares ISAs will comprise any income (interest or dividends) from the underlying interest plus any growth in capital value. An individual needs to be comfortable taking on the risk of market fluctuations in the value of their investment.

Innovative Finance ISA

From 6th April 2016 a new type of ISA was introduced to sit alongside both the traditional Cash ISA and Stocks & Shares ISA. The new Innovative Finance ISA (IFISA) will allow savers to use some or part of their annual ISA investment allowance to receive tax-free interest and tax-free capital gains on funds lent through FCA-regulated Peer-to-Peer Lending platforms.

Lifetime ISA

From April 2017 all eligible savers between the ages of 18 and 39 will be able to open a Lifetime ISA.

A Lifetime ISA a new type of account which is designed to help young people to save for both their first home and for their retirement simultaneously. You can contribute up to £4,000 into this ISA in each tax year, the government will then provide a 25% bonus on these contributions at the end of the tax year, this means savers can gain an extra £1 for every £4 they save, so those who save the maximum each year will receive a £1,000 bonus on their savings each year.

The money held within the lifetime ISA can be used to either pay for part, or all of a first time home or it can be used to save for retirement. Savers will be able to benefit from earning the bonus on their contributions until the age of 50 years and will be able to have a maximum individual contribution of up to £128,000 which can be matched by the government, to a maximum of £32,000.

Investment period

An ISA offers cash investors the same tax-free conditions as share investors without any lock-in period. Withdrawals can be made at any time without losing tax relief attributed to the account (as long as the rules of the individual product allows it).

Find out more about Brookson's Accountancy Services by completing the form below