Since Gordon Brown introduced Individual Savings Accounts (ISAs) in 1999, they have become a favoured option for UK savers and investors to hold their money.
In data published in June 2021, the government confirmed that around 13 million people in the UK were subscribed to in the 2019/20 tax year. By the end of that tax year, the total market value of adult ISAs was £620 billion.
After clearing any unsecured debt, such as credit and store cards, along with setting up your pension and making sure you have the right level of protection in place, ISA investment should be your next financial priority.
In this article, you’ll find five great reasons ISAs should be an important part of your savings and investment strategy.
1. ISAs are a highly tax-efficient way to save
The key benefits that make ISAs such an attractive investment option are related to their tax-efficiency.
With normal savings or investments any income derived from your fund is usually subject to either Income Tax, at your marginal rate, or Capital Gains Tax (CGT), on amounts in excess of the respective Income Tax and CGT Personal Allowances.
In contrast, any income you draw from your ISA is free of both, regardless of the amount you draw.
With careful planning, ISAs can form a highly effective part of your tax-planning strategy.
2. Each individual has an ISA allowance of £20,000
Because of their associated tax advantages, you’re limited in how much you can contribute to an ISA in each tax year.
The current ISA allowance for the 2021/22 tax year is £20,000 for each UK adult. The allowance will remain at £20,000 in the new tax year, starting on 6 April 2022.
So, between you, you and your spouse or partner can save up to £40,000 in ISAs each year. By maximising your contributions, you’re able to build up a substantial fund quickly, which can form a valuable and flexible part of your financial plan.
3. They work well alongside other investment options
Even considered in isolation, ISAs are an attractive way to save and invest. Beyond that, they can also play a valuable role when used alongside other savings and investment options.
For example, you can use ISAs alongside your pension savings when planning your income in retirement to add a valuable layer of tax flexibility.
You’ll pay Income Tax on income you draw from your pension fund, but by carefully managing how much you draw from your pension and ISAs, you’ll be able to minimise the amount of tax you pay.
Because ISAs aren’t subject to CGT, they can be a useful vehicle for providing a tax-efficient income strategy alongside other investments that may not benefit from the same preferential tax treatment.
You should bear in mind that, unlike pension funds, the value of your ISAs form part of your estate for Inheritance Tax (IHT) purposes. So, you may want to consider drawing income from your ISAs before your pension fund to help minimise the amount of IHT payable on your death.
4. There are a range of different types of ISA to choose from
There are a series of different ISA options you can use to help you maximise your tax-efficient savings.
Cash ISAs are effectively saved in a standard account similar to a bank or building society savings account. The growth you’ll earn on your Cash ISA will be formed of the interest on your money.
If you hold a substantial amount of cash for any reason, it’s worth trying to put as much of this as possible into ISAs – subject to your financial position and other issues such as immediate access to the money if required.
You won’t pay tax on any interest you receive from your Cash ISA.
Stocks and Shares ISA
Investing in a Stocks and Shares ISA means you won’t pay tax on the returns you generate on your investments.
With standard investments, you’ll typically pay CGT on the increase in value (the gain) of an asset from when you buy it to when you sell it. You have an annual CGT exempt amount before tax is chargeable. This is currently £12,300 in the 2021/22 tax year and will remain the same in 2022/23. Most gains in value over that amount will be subject to CGT.
By investing through a Stocks and Shares ISA, you’ll be entirely free from having to pay CGT on those investments.
A further ISA option is the Lifetime ISA (LISA). This option is designed for people between the ages of 18 and 39 to provide a tax-efficient vehicle to save towards a house purchase or long-term pension savings.
If you’re eligible, you can save up to £4,000 into a LISA each year.
As well as the tax advantages of normal ISAs, the government will also add an extra 25% on top of your LISA contribution. So, if you make the maximum LISA contribution of £4,000 you’ll receive an additional £1,000.
It’s important to remember that LISAs should be treated as a long-term investment. If you take any money out of your fund for any reason apart from buying your first home or for retirement, there’ll be a 25% charge on the total amount you withdraw.
5. You can also invest in an ISA for your children
As well as your own personal £20,000 ISA allowance, you can also invest in ISAs for your children. The current annual ISA allowance for each child is £9,000, paid into a Junior ISA (JISA).
As with your own ISA options, you can either invest in a Cash JISA or a Stocks and Shares JISA. Alternatively, you can split the investment between the two.
JISAs are a very tax-efficient way to build a fund for your children that they can access when they reach 18.
At that time, the JISA is converted into a standard ISA and ownership and responsibility for managing the account passes to your child.
Get in touch
To find out more about ISAs, and how you can use them as part of your investment strategy, please get in touch. Email firstname.lastname@example.org or call us on 0800 055 6585.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
The value of your investment can fall as well as rise and is not guaranteed.
The information contained in this article is based on the opinion of LEBC Group Ltd and does not constitute financial advice or a recommendation to any investment or retirement strategy, you should seek independent financial advice before embarking on any course of action.