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Make the most of ISA tax savings

The basics of individual savings accounts (ISAs)

Individual Savings Accounts, or ISAs for short, are a kind of savings or investment account that lets individuals in the UK save and invest their money without having to pay tax on it. They are popular among savers due to their special tax status. Interest, income, or capital gains from an ISA are not taxed, making them a good way to save.

Cash ISAs are available for individuals in the UK aged 16 or over. Innovative finance ISAs, stocks and shares ISAs and lifetime savings ISAs can only be opened by individuals over the age of 18. There is a Junior ISA for children under 16 who don’t hold a child trust fund, but they will not be able to withdraw the money until they are 18. Every year, there’s a limit to how much you can put into your ISA accounts. During the tax year that goes from the 6th of April 2024 to the 5th of April 2025, this limit is £20,000. This limit applies across all ISAs that you may hold. Junior ISAs have an annual savings limit of £9,000 for the 2024/25 tax year.

How ISAs offer tax-free income and growth

ISAs can be a tax-efficient way to save. There is no income tax on cash saved in cash ISAs meaning that even when interest rates are high, you do not have to worry about a potential income tax liability arising from your savings. Furthermore, when selling stocks and shares that are held in an ISA, you will not have to pay Capital Gains Tax (CGT) on the difference. Therefore, you can hold onto the profits from your investments without having to include them in a personal tax return. Dividends and income from ISAs are also exempt from taxation meaning you are free to reinvest the full amount or withdraw some of the cash whenever you like.

This article isn’t personal advice, merely informative information on ISAs. ISA rules and tax legislation can change, and any benefits depend on your circumstances. If you’re unsure what’s right for you, ask for financial advice.

Annual ISA allowance

Every year, there’s a limit on how much money you can put into ISAs. For the tax year 2024/25, this amount is £20,000. This means if you’re saving or investing in your ISA up to that amount, you won’t have to worry about paying any taxes on what your investments earn or gain in value. This limit is across all of your ISAs, meaning you can split your savings between various accounts provided the total contribution to ISAs over the year is not in excess of £20,000. Lifetime ISAs have a limit of £4,000 per year, which contributes towards your annual £20,000 limit; this type of ISA is only available to people ages between 18 and 39 and is designed for those looking to save for a first house or retirement.

It is important to know that your allowance does not roll over to the next tax year, and therefore, the maximum you can put in each tax year will always remain the same. You can transfer between ISAs once you have set them up, and this will not count towards your allowance, so if you want a new ISA in addition to any you have currently, you can transfer some or all of the balance.

Types of ISAs and their benefits

There are four main kinds of ISAs you should know about. Each one has its own perks and benefits. Below are the four main types of ISA and details on what differentiates them from other savings schemes.

Cash ISAs

Cash ISAs are ideal for those who want to earn tax-free interest on their savings while still being able to withdraw their cash. Some providers may offer fixed-term cash ISAs, for which you will have to pay an early access fee to withdraw money before the end of your term.

Cash ISAs are helpful if you wish to hold onto a liquid asset that can be withdrawn easily without the risks of stocks and shares. For advice on which ISA is right for you, please contact a financial advisor.

Stocks and shares ISAs

Stocks and Shares ISAs, also known as Investment ISAs, let you invest your money into various assets. The advantage of doing this through stocks and share ISA is that any capital gains made on the value of shares held are not liable for taxation when you realise the gain. Furthermore, any dividends or income made from holding the stocks and shares will not be taxed, meaning you can hold onto more of your income.

The downside of a stocks and shares ISA is that you may be charged a fee by your provider for any transactions made. Furthermore, it is not certain that the value of investments will increase over time. Markets can be volatile, and the value of your investment may decrease over time, meaning it is a less certain way of building up savings. Most providers offer advice on selecting stocks and shares for your ISA. Alternatively, you can choose to have a fund manager take care of your investments for you. Speaking to a financial adviser or ISA provider about your specific situation and aspirations for your savings can help you decide what the best route for you is.

Lifetime ISAs

Lifetime ISAs are all about helping you save up for your first house or setting aside money for when you retire. Individuals aged 18 to 39 are eligible to open a lifetime ISA. Once opened, you are allowed to put up to £4,000 into your Lifetime ISA each tax year until you are 50 years of age. The government then tops up your account with a 25% bonus on any money you have paid into your ISA for the year. Most providers allow you to hold either cash or stocks and shares in a lifetime ISA.

This offering can be an attractive option for those looking to save towards buying their first house, as there are rules about when you can withdraw your money from a lifetime ISA. You can either withdraw your money when buying your first home, reach 60 or are terminally ill with under a year to live. While it is possible to withdraw your money for other reasons, you will be subject to a 25% withdrawal charge, allowing the government to recover the bonus it paid on your deposits.

If you are uncertain about whether this is the right choice for you, please contact a financial advisor.

What happens if I exceed my ISA allowance?

If you put more money into your ISA than the limit allows in a tax year, you will have to withdraw the amount as well as any interest or gains made on it. There will be a tax liability for any gains made on deposits over the limit.

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