In the United Kingdom, Individual Savings Accounts (also known as ISAs) are a specific type of savings accounts which enjoy a special taxation: the government grants an exemption on any interest, income, or capital gains tax for the first £20,000 kept in this type of account each year.
The capital kept in an ISA account is then reinvested by the institution that manages it. There are different types of ISAs, which differ according to the type of investment that is made. We are talking about particularly interesting investments, precisely because of the tax exemption. Let’s now look at the different forms of ISAs.
Types of ISAs
To understand which types of ISAs are available to UK residents, one can take advantage of Moneyfarm ISA guide, very clear and detailed. However, let us already now try to highlight the features that allow one to distinguish between the different types of ISA. The most popular ones are the Cash ISA and the Stocks and Shares ISA; basically, they work is a similar way in terms of access possibilities and the annual tax-free limit. These two types of ISAs differ in the interest rates offered and the type of investment for which the capital raised is used. Cash ISAs are guaranteed fixed-rate investments; Stocks and Shares ISAs, on the other hand, involve the use of the capital raised for equity investments, with a clearly higher risk involved but also with higher potential returns. There also are some particular ISAs: Junior ISAs, which are designed for children under the age of 16, and LISAs (or Lifetime ISAs), which enjoy a government bonus of 25 per cent of the amount paid in.
ISA allowance
As far Cash ISAs and Stocks and Shares ISAs are concerned, it must be remembered that the annual allowance is set at £20,000 for the current tax year. In other words, each contributor can open either a Cash ISA or a Stocks and Shares ISA, but the paid-up capital in the two solutions, added together, cannot exceed the ceiling. On the other hand, it is not possible to start two ISAs of the same type.
LISAs are only aimed at individuals under the age of 40 and a maximum sum of £4,000 per year can be paid out, which is within the £20,000 ceiling. After the age of 50, it is no longer possible to accumulate funds on this type of account; it is possible, however, to leave the capital collected over time invested here, to obtain further returns. The funds thus collected can be used to buy your first home or as a supplementary pension. Junior ISAs, on the other hand, are only for minors and are capped at £9,000 per year. Remember that the tax year starts in April; you therefore have until 5 April 2023 to accumulate capital in this type of investment. Usually, taxpayers pay into their ISAs a certain amount each month.
Risks, duration of the investment and returns
The ISA investment proposals available today are varied and involve different types of use of accumulated capital. The choice should be made both by reasoning about the duration of the investment and the risk threshold one is willing to take. At present, Stocks and Shares ISAs offer a high return, but many are reluctant to embark on an investment with medium or high risk and many prefer fixed returns.
Clearly, ISAs are deemed to be particularly interesting precisely because they are not subject to any kind of taxation; this feature alone can significantly reduce the amount of a taxpayer’s annual taxes. Remember also that it is possible to transfer the capital accumulated in one ISA to another similar type of investment. Keeping below the annual cap of £20,000 a year is essential, however, to enjoy the tax-efficiency of this investment opportunity. Moreover, it is also important to choose a wealth management company that is reliable and secure, as well as to consider one that offers simplified management of all investment options.
