Savers need to be aware of a crucial rule to maximise their savings. Typically, basic-rate taxpayers can earn up to £1,000 on savings before tax is due, while higher-rate taxpayers have a limit of £500 and additional rate taxpayers receive no allowance.
However, cash ISAs offer the opportunity to save significantly more each tax year without incurring tax on interest. Recent Bank of England data reveals that nearly £49.8 billion was deposited into cash ISA accounts.
Despite this, savers could find themselves tripped up if they don’t monitor how much they deposit into their cash ISA, particularly if they wish to diversify their savings and open multiple accounts.
Cash ISA tax allowance
The cash ISA allows all savers to stash away £20,000 each tax year with the added bonus of tax-free interest. This limit isn’t confined to just one cash ISA, meaning an individual could open several cash ISA accounts and distribute their savings.
However, the £20,000 limit applies to all the accounts combined, not £20,000 per account. For instance, you could have £15,000 in a cash ISA, £2,000 in an innovative finance ISA, and £3,000 in a stocks and shares ISA.
Therefore, before opening a new cash ISA, ensure you haven’t exhausted too much of your allowance to the extent that it will impact your other savings.
Different types of ISAs
Cash ISA
Cash ISAs are a traditional type of savings account, offering the advantage of tax-free interest, unlike standard savings accounts. Furthermore, any interest earned in a cash ISA does not contribute to the £20,000 savings limit each tax year.
There are various types of Cash ISAs available for savers, including:
- Easy-access cash ISAs – these allow you to access your saved money at any time without additional charges.
- Fixed rate cash ISAs – these may offer a higher savings rate but could impose a penalty if you wish to withdraw your money.
- Notice Cash ISAs – these require advance notice if you want to withdraw your funds. Some savers may also have a Help to Buy ISA, although these are no longer open to new applicants.
These ISAs were created to help first-time buyers purchase their first property by providing a 25% government bonus up to a maximum of £3,000.
Lifetime ISA
Lifetime ISAs (LISA) are designed to assist individuals in saving for either their first home or retirement. They have a tax year limit of £4,000, which is lower than other ISAs.
Typically, there are two types of LISA:
- Cash LISAs – these are the more traditional savings options that simply involve depositing cash and letting it accumulate interest.
- Stocks & Shares LISAs – this type of account carries more risk as it involves investing your money in the stock market.
One significant downside to LISAs at present is the age restriction; they can only be opened by individuals aged between 18 to 39. Furthermore, the funds can only be withdrawn for purchasing a first home or upon reaching the age of 60 or over.Any other withdrawals will incur a hefty 25% penalty on the amount taken out.
Junior ISA
Junior ISAs primarily aim to accumulate savings for children. They permit savers to deposit up to £9,000 per annum into the account (this is separate from any additional Cash ISA allowance) each tax year.The funds deposited into the account can only be accessed by the child once they turn 18, although they can begin managing the account themselves from the age of 16.
Similar to LISAs, savers can choose between a cash Junior ISA or a Stocks and Shares ISA.Stocks and Shares ISA.
Stocks and Shares ISA
The primary objective of a Stocks and Shares ISA is to allow the funds deposited into the account to be invested in funds, bonds, and company shares. These are the riskiest types of ISAs available, and savers should carefully consider whether they are comfortable with the typical risks associated with investing.
This ISA offers a key advantage in that any money invested is exempt from capital gains tax (CGT), a levy on profits made from selling investments. Furthermore, they are free from tax on bond interest and dividend income, making it an attractive option for those considering investing.
However, a significant drawback is that your savings are not protected against any investment losses, with the worst-case scenario being the loss of all invested funds.
Innovating Finance ISA
An Innovative Finance ISA allows the company you open it with to use your money to lend to borrowers and businesses. In this case, you’ll earn interest for lending the money, with the provider taking a cut.
Interest earned from the money you’ve lent will not be taxed, but there’s a risk of losing money if the loans aren’t repaid. Additionally, withdrawing returns could take some time as you may need to wait for other investors to buy out your loan.
Savings in an innovative finance ISA are not automatically protected, although the provider may have some safeguards in place, but this isn’t guaranteed.
