What is an ISA?

Summary

• The Individual Savings Account is a tax-free saving account, which enables us to protect our savings and investments.
• There are different types of ISA available; one can choose depending upon the need.

The Individual Savings Account, or ISA, is a long-term savings account available for the citizens of the United Kingdom, where the deposits are exempted from taxes on its returns. These accounts were introduced by the UK government to encourage people in investing and saving.

However, these accounts are not the right investment options, and it only enables us to protect our savings and investments from tax on capital gains, dividends, and interest.

The amount of money you can invest in your ISA is restricted to an upper limited, which changes every tax year. Like for 2021/22, the ISA allowance is £20,000. The tax year for the UK is from the 6 April current year to the 5 April the following year.

Also Read: What Are the Best Investments in the UK?

The Individual Savings Account can be opened with any bank, building society, credit unions, stockbrokers, or any other financial institutions depending upon the interest rates offered. However, later ISA can be transferred to the new provider, called ISA transfer in.

What are the types of ISA available?

Stocks and shares ISA: This account allows investment in various financial products such as shares, bonds, unit trusts or funds.

Stocks and shares ISA will invest your deposits in the stocks, and the invested company may distribute profit to you as a dividend, which will be free from tax for this ISA. However, the overall value of your investment may fall, and you may end up getting less than the original deposit.

Cash ISA: The ISA account is like a normal saving account. You can deposit or withdraw as often as you want. The only difference between cash ISA and a saving account is the interest earned, which will be tax-free in case of the cash ISA. Although the interest rate offered is too less and ultimately, you will not be able to beat inflation.

It is the choice of an investor to either split their yearly ISA limit in different types of ISAs or invest entirely in anyone ISA. However, unused ISA allowances cannot be carried forward from one year to the next. Apart from these ISAs, some Specialist ISAs are also there.

Junior ISA: In these accounts, parents can invest money for their child’s future. Money invested in this type of ISA is locked till your children’s 18^th birthday.

Lifetime ISA:  It is designed to help you save for your first home and your retirement. 

Also Read: Retirement Planning – Tips to Manage Your Retirement Savings 

Innovative finance ISA:  This ISA contains peer-to-peer loans instead of cash or stocks. Peer-to-peer lending matches up investors with the borrowers who need the money. This lending through the online process does not involve any bank in between, and you end up generating more return for the money you have lent.

How to open an ISA?

ISA can be opened over a phone call, by post, visiting a branch or online, for a minimum amount that can be as low as £1 and can go up to £1,000.

You need to provide basic details such as name, address, national insurance number along with a declaration form, which tells that you have understood ISA rules and allowances.

Once the account is opened, you will be given a passbook, certificate, or an online statement to view the details.

Some more on ISA

• You can only pay into one cash ISA; one stocks and shares ISA, and one innovative finance ISA in each tax year. However, investment in these ISA can be done every tax year, which will leave you with multiple ISA accounts, one each for every financial year.
• ISAs are flexible in nature, and money can be withdrawn from an ISA and put back during the same tax year, which would not affect your ISA allowance tax limit.
• ISAs are protected under the Financial Services Compensation Scheme (FSCS), which protects your savings up to £85,000 per financial provider.