What is an ISA?

Confused about what an ISA is and why you should get one? This short video will help explain what it is and how to use it!

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Each year you’re given an annual ISA allowance and this is the current limit: £15,240.

You have until April the 5th, 2016 to invest as much of this as you can afford. On April the 6th you’ll get a new allowance.

There are two types of ISA - a stocks and shares ISA and a cash ISA.

Stocks and shares ISA

Stocks & shares ISA’s mean you don’t have to pay capital gains tax, which is sometimes charged on investment profits.

With a stocks and shares ISA, there are tax benefits on any capital gains you make and if you’re a higher rate tax payer - on any dividends you may receive.

Cash ISA

A cash ISA is like any other savings account - but you won’t pay any tax on the interest you earn.

Investing in a stocks and shares ISA is higher risk than a cash ISA. If the shares you’ve invested in are not performing well, you could lose money.

You can invest as much as you want into either type of ISA but the combined amount can’t go over your annual allowance. Try not to touch savings you’ve stored in an ISA, because if you make a withdrawal, you won’t be able to pay it back in the same tax year, if it takes you over your annual allowance. But, don’t be put off this, as ISA’s are still the best port of call for your savings and if you want to get access to your money, you can choose an easy access ISA.

If you can afford to lock your savings away for twelve months or more consider a fixed rate ISA instead as the rates on interest tend to be higher.

Interest rates on easy access ISA accounts are variable and often come with initial bonuses. Keep an eye on what rate your easy access ISA is paying and move your money if it becomes uncompetitive.

You can switch your money from one cash ISA to another without losing the tax benefit as long as the new ISA accepts transfers in. Not all ISA’s do accept transfers in, so make sure you check first.

If you don’t have an ISA make sure you open one before April the 5th. That way you can use this year’s allowance and top up with next year’s allowance when the new tax year starts on April the 6th.

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