Highlights

• Individual Saving Account (ISAs) is a saving account that allows investors to save money and earn interest tax-free.
• The annual ISA allowance stands at £20,000 for the tax year 2022-23, the same as in the tax year 2021-22.
• There are four types of ISA accounts that include Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, and Lifetime ISA.

The Individual Saving Account (ISAs) is a saving account that allows investors to save money and earn interest tax-free. You can open an ISA or ISAs each tax year. You can have multiple accounts that may help you in fulfilling your financial goals. The annual ISA allowance stands at £20,000 for the tax year 2022-23, which is the same as in the tax year 2021-22.

2022 Kalkine Media® 

There are four types of ISA account with different features and goals aimed at different types of savers and investors. Let us now know what type of ISA may fit you and your investment goal.

1. Cash ISAs

Cash ISAs are simply saving accounts with a pre-determined saving limit that can be opened by a person aged 16 or over and for which one does not have to pay tax on the interest earned. Cash ISAs come in different forms, such as fixed-rate accounts, variable-rate accounts, and easy access, where taxpayers can earn £1,000 of saving interest a year without any tax liability. But while a person can open several ISAs, cash ISA can be opened only once per tax year.

Pros

• Cash ISAs are easy to open and run
• Provide tax-free interest over £1,000 a year.
• Available in different forms which offer specific features to suit a range of different savings preferences.
• The Financial Services Compensation Scheme (FSCS) covers the first £85,000 held with each FCA, which makes it a safer investment option.
• Without affecting allowance, they can be easily inherited by the partner or spouse of the account holder.
• Can be a good saving option to invest for up to five years.  
• Easily transferable to a different provider.

Cons

• Cash ISAs offer a lower rate of interest than other saving accounts.
• If a taxpayer earns less than £1,000 a year in interest per tax year, there’s no real tax benefit.
• In high inflation, your money losses value in cash savings.
• You cannot add the £20,000 allowance in the 2022/23 tax year to multiple accounts.
• If you make a withdrawal in a straightforward way to your current account, the amount will not carry the tax-free status anymore.

Also Read: How ISA investors can make the most by investing early in new financial year

2. Stocks and Shares ISAs

Stock and Shares ISAs, also known as investment ISA, are a tax-free investment account that allows investment of up to £20,000 for the tax year 2022/23 without any tax liability on capital gain and dividend. This ISA allows the account holder to invest in a wide range of investment options, such as shares, bonds, funds, and investment trusts.

Pros

• Stocks and Shares ISAs generally offer a higher return than cash ISAs over time but are riskier.
• The Financial Services Compensation Scheme (FSCS) covers the first £85,000 held.
• Protect capital gains and dividend income from tax.
• Without affecting allowance, they can be easily inherited by the partner or spouse of the account holder.
• Allow investment across a wide range of investment options such as shares, funds, bonds, and investment trusts.
• Can easily be transferred to a different provider. 

Also read: Ferrexpo, M&G, CMC Markets: Stocks you may shortlist for next year’s ISA

Cons

• They may fall in value if your investments fail to perform.
• Suitable for investors with a high appetite for risk and who can invest money for at least five years.
• Stocks and Shares ISAs usually charge a fee to look after your money.
• May be unsuitable for short-term investors.
• Investments in Stocks and Shares ISAs need to be monitored regularly.

VIDEO: How Can You Make Withdrawals From An Individual Saving Account? - YouTube 

3. Innovative Finance ISAs

First introduced in April 2016, an innovative finance ISA provides tax-free interest on peer-to-peer loans, which is a form of investing where you lend money directly to individual borrowers, property developers, and businesses by using an online portal for the exchange of cash.

Pros

• Offer higher rates of interest than traditional saving accounts ad it cut out banks.
• Provide tax-free interest on investments.
• Easy to open and access via online peer-to-peer platforms.
• Lending to private borrowers or taking a stake in crowdfunded investment could yield a return as high as 9% per annum.
• Allow you to invest in a broader range of assets such as real estate.

2022 Kalkine Media®

Cons

• Highly risky as compared to other ISAs and returns are not guaranteed.
• Are not covered by the Financial Services Compensation Scheme (FSCS) as they are peer-to-peer investments.
• Many factors may affect interest rates, such as deal flow or bad debts.

Also Read: How can you make withdrawals from ISA?

4. Lifetime ISAs 

The newest Lifetime ISAs added for the savers is tax-free savings or investments account designed to help those aged between 18 and 39 and allow them to save £4,000 a year tax-free for buying their first home or for retirement.

Pros

• It offers a 25% bonus from the government each year, on top of the £4,000 investment.
• Allow you to save for buying your first home or for retirement.
• The annual allowance is £20,000 and if you invest £4,000 in lifetime ISA allowance, it doesn’t replace the higher limit, but it is subtracted from it.
• You can easily transfer your Lifetime ISA to another provider.
• It is an individual account so a couple can open one each and can receive two government bonuses.

Also read: How ISA investors can make the most by investing early in new financial year

Cons

• Withdrawing money from Lifetime ISA before you reach the age of retirement or not using it towards your first house, will result in a 25% penalty.
• If you are not using the money for buying your first house, then you have to wait for your retirement to withdraw the money.
• You can’t use the money to buy a first home with a value above £450,000.

Also read: How to choose stocks for investments in UK