Individual savings accounts, also known as ISAs are accounts which give the holders the possibility to decide whether to save or invest their money. As a matter of fact, ISAs come in different types in order to meet the needs of as many people as possible, including underage children. These financial wrappers are approved by the UK government and they work in a tax-efficient way: when you save or invest money you will not be expected to pay Capital Gains nor income tax.
Anyway, if you want to open an ISA, it is crucial to comprehend more about these financial tools. For example, you should know that you should comply with the annual ISA allowance. It is the maximum amount you can put in your account per tax year and it is fixed at £20,000 for 2022/2023.
But what are the other important things to know before taking this new path? Let’s discover more about this matter.
What is an ISA and how may you can have
Every resident in the UK can open an ISA, but some types of Individual Savings Accounts have a minimum age requirement. However, there is also an account designed for parents who want to save or invest for their underage children, that is to say the Junior ISA.
In this case, one of the most frequently questions among the holders is “how many isas can I have in the UK?“ It is possible to have different types of Individual Savings Accounts, but you can only open one ISA for each tax year. Anyway, it is possible to make a contribution for each version of ISAs, but be aware that the total amount you put into must have not exceeded the ISA allowance set for each fiscal year.
There are five types of Individual savings accounts, considering also the aforementioned Junior ISA, and each of them has different features. Thus, you have to choose the right one for you depending on your goals and needs. You have to consider also your attitude to risk, the interest rates and whether you want to save or invest money in the short or long term.
- Cash ISA: it works similarly to a traditional savings account since you earn interests based on a percentage rate. It is important to underline – once again – that you don’t have to pay taxes on the interests collected over time. This type of account is one of the common choices among those who have a low-risk profile, since the money is not subject to the market’s swings. However, Cash ISAs could not be a valid option if the inflation rate overtakes their interest rate.
- Stocks and Shares ISA gives the holders the possibility to invest in a wide variety of financial products, such as shares, bonds, etc. By opening this kind of account, the money will be invested, so it may be risky since the outcome will solely depend on how investments have performed.
- Innovative Finance ISA, also known as IFISA, are another type of account which lets the holder the possibility to invest in peer-to-peer lending. In other words, the holder lend money to borrowers with the goal of earning interests back. However, there are risks involved, since the borrowers can default on repayments, and you will not have any guarantee.
- Lifetime ISA (or LISA) is another type of account designed for those aged between 18 and 40. It is aimed at helping the holder to save money either for his or her first house or for retirement. Those who open this specific account can put up to £4,000 per tax year and the government will give a 25% contribution.
If you cannot figure out which type of account may be suitable for your situation, it is advisable to seek the help of professionals, whose experience will be valuable for having a clear overview of the matter.