Tax-efficient saving via ISAs

The UK has some of the most generous tax-efficient saving accounts in the worlds, commonly known as Individual Savings Accounts or ISAs.

There are four types of ISA’s available to UK residents: cash ISA’s, stocks and shares ISA, lifetime ISA or LISA and Innovative finance ISA.  

If desired, you can have all of the four types of ISA’s, however, there is a £20,000 yearly allowance across all of the ISAs. If you don’t use your ISA allowance within a tax year, it does not roll over – so in other words if you don’t use it, you’ll lose it.  

Let’s take a look at each type of ISA and what they offer. 

Cash ISA 

A cash ISA is essentially a basic savings account available to UK residents over the age of 16. The recurring theme across all types of ISA’s is that any interest earned within the ISA is tax-free.  

There are two types of cash ISAs available to savers: easy access cash ISAs and fixed-rate cash ISAs. Easy access provides flexibility to savers to access their money without penalty (each ISA will have it’s own terms and conditions to consider).

However, these types of cash ISAs tend to have lower interest rates at the convenience of having easy access. On the contrary, fixed-rate cash ISAs tend to offer higher interest rates, but they tend to have a penalty for withdrawing outside of the set term. 

Lifetime ISA (LISA) 

LISA’s are one of the most lucrative, yet restrictive, ISA’s available to savers between the ages of 18 and 40. Although the limit is £20,000 per year across all ISA’s, the LISA is unique in that you can only put a maximum of £4,000 per year into this account.  

It’s very important to note that money saved within a LISA can only be used for 2 things to avoid penalty – a first-time home purchase and/or retirement (60+).

LISA’s benefit from tax-free interest as the other ISA’s, but in addition the government top-up this account by 25% to a maximum of £1,000 per tax year. So for every £4 you put into the account, you’ll receive a £1 top-up to a maximum of £1,000 per tax year.  

There are quite a few rules to be aware of when it comes to LISA’s and their use which are too lengthy to discuss in this article, so make sure to get more information.  

Stocks & Shares ISA  

This account is available to UK residents 18+, and allows money within this account to be invested in various assets, such as stocks and shares or bonds. Capital growth and dividends earned within a stocks & shares ISA are tax-free, no matter how large that sum may be.  

Money held within a stocks & shares ISA can be accessed at any point without any penalties or restrictions, once the funds are no longer invested. Of course, with any investments your capital is at risk, and there is no exception to this whether it is within an ISA or not.  

Innovative Finance ISA 

An innovative finance ISA allows you to partake in a peer-to-peer lending scheme, where your money is loaned to a business or individual, and the borrower pays back the loan to you plus an agreed amount of interest over a set term. As this is done within an ISA, the interest earned would be tax-free. 

However, as banks are not the intermediary in this transaction, it carries higher risk that borrowers can default on the loan and essentially your money would not be paid back to you.

Additionally, innovative finance ISAs are not covered by the financial services compensation scheme (FSCS), and therefore you have no protection to get the money back if the borrower defaults on the loan. 

If you are saver looking for a place to stash away you cash, ISAs are credible accounts helping you to get more out of your money. 

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