ISAs (Individual Savings Account) are savings accounts that let you save money without paying income tax on the interest you earn.
The two primary ISAs are cash ISAs and stocks and shares ISAs. With a cash ISA, you can save your money in a bank or building society account, and with a stocks and shares ISA, you can invest your money in shares or unit trusts. The best thing about ISAs is that the government gives you a tax-free allowance each year, which means you don’t have to pay income tax on the interest you earn.
To qualify for an ISA in the UK, you must:
- be a UK resident
- be over 16 years of age
- have a valid National Insurance number
- have not already opened an ISA this tax year
- you can only open one of each ISA each tax year
How to open an ISA
Check that you are eligible
You can start with getting all your documents together ensure you have your National Insurance number and residency status handy.
Choose the suitable ISA for you
There are two types of ISAs- cash and shares. Cash ISAs let you save your money in a bank or building society account, and with a shares ISA, you can invest your money in shares or unit trusts.
Find an authorised provider
To open an ISA, you need to find an authorised provider. You can search for one on the Financial Conduct Authority (FCA) website.
Complete the application form
Once you’ve found a provider, they will give you an application form to complete. The form will ask for personal details, such as your name and address.
Decide how much to save
The minimum amount you can save in an ISA is £100, but most providers have higher limits. You don’t have to save the total amount all at once – you can add money to your account whenever you want.
Transfer your money
Once you’ve completed the application form, the provider will send you a Welcome Pack with all the details you need to start saving. You can then transfer money from your current account into your new ISA account.
Start earning interest
Your ISA provider will give you a payslip each year, which will show how much interest you’ve earned. The interest is paid tax-free, meaning you don’t have to pay any income tax on it.
Renew your ISA each year
To keep your ISA open, you need to renew it every year, either online or by post. If you want to stick to the same provider, they will renew your account automatically.
Risks of investing in an ISA
Shares and unit trusts can go up or down in value, so there is a risk that you could lose money if you invest in them.
Not getting back the original amount you invested
Some shares and unit trusts may not give you back the original amount you invested, so it’s essential to read the small print before you invest.
Not getting the full tax benefits
If you decide to take money out of your ISA, you may not get the full tax benefits. For example, you may have to pay a withdrawal charge if you take money out of your cash ISA in the same year that you put it in.
Not being able to access your money
Some ISA providers may not let you withdraw your money until a certain number of years have passed. It’s crucial to check the terms and conditions before opening an account.
As with any financial product, there is a risk of fraud. Be wary of unsolicited calls or emails asking for your details. Never give out your PIN or password to anyone.
You can find a complete list of authorised ISA providers on the Financial Conduct Authority (FCA) website. Some of these include:
- Lloyds Bank
- TSB Bank
- Virgin Money
Why do people invest in ISAs?
To save money
The most obvious reason to invest in an ISA is to save money. The interest rates on ISAs are often higher than those on regular savings accounts, and you don’t have to pay any income tax on the interest.
To avoid inheritance tax
People sometimes invest in ISAs as a way of avoiding inheritance tax. If you die and have money in an ISA, your beneficiaries will receive the money tax-free.