Individual Savings Accounts (ISAs) Explained
What are ISAs?
IIt's easy to be confused about Individual Savings Accounts (ISAs). Over the years they seem to have had many re-inventions; everything from their name to the amount of cash you could put into an ISA on a yearly basis has changed, but hopefully we'll help clear up any ongoing confusion.
ISAs are the smartest way to save because you don't get taxed by the Government on the money you put into an ISA account. That means 100% of the interest is yours to keep.
With other savings accounts the Government (via HMRC) deducts 20% tax from the interest (40% if you are a Higher-rate taxpayer) which you make on the account before that interest is handed over to you, With ISAs, however, the Government gives you a tax break and doesn't take anything.
The only catch? You can only place a maximum of £15,000 in each tax year into an ISA account.
Aren't There Different Types of ISA?
There are now officially only two kinds of ISA, a Cash ISA and a Investment ISA.
A Cash ISA is simply a savings account which earns interest. An Investment ISA (sometimes aka a ‘Stocks & Shares ISA’) is usually under-pinned by assets such as Shares (Equities), Corporate Bonds, etc. – with the ensuing potential of good capital appreciation or risk of capital loss.
You can mix ‘n’ match your allowance to whatever degree suits your needs and wants i.e. £10,000 into an Investment ISA and £5,000 into a Cash ISA, or any combination thereof.
Another advantage of utilising Investment ISAs is that they are free of Capital Gains Tax (CGT) for all tax-payer types, including Higher-rate.
Why Shop Around?
Not all ISAs are made equal. In fact, the higher interest rate on your ISA, the more money you stand to earn in interest, it's that simple. Some ISAs give lower interest rates than others and offer no difference in services, so get online and check out what's on offer. However, you must remember, using more than one price comparison site is best and the better deals might not always be at the very top of the list.
For Stocks and Shares ISAs, there are plenty of special accounts which can be opened with banks, with these you'll usually receive a little advice and guidance, especially if you're new to share dealing. More advanced share dealers, who understand the markets well, could opt for a 'Self-Select' Investment ISA which will allow them to choose their own investments.
Experienced share dealers also often use the Investment ISA wrapper to go through 'execution-only' online Stockbrokers and Discount Brokers to get good deals on their share purchasing whilst also benefiting from not having to pay Capital Gains Tax when they sell their shares.
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Are There Any Charges?
The simple answer is no. Or rather, there shouldn't be.
ISAs usually don't have any additional charges associated with them at all but occasionally, with some 'Self-Select' ISAs there is a setting up or ongoing administration charge. If you choose an Investment ISA you'll also have to pay for some transaction charges to sell or buy shares.
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