Being intentional with your savings accounts can be the quickest way to have control over your finances and earn as much as you can outside of your income. A fantastic way to save or invest money is by opening an ISA account. You may have heard of this term when opening your bank account so read further on my beginner's guide to what ISA accounts are.
What is an ISA?
An ISA, or Individual Savings Account, is a tax-free option to put into savings or investing. If you've been thinking about starting a savings account or getting into investing, an ISA account could be a good place to start. Other savings accounts may require you to pay income tax on any interest you earn, which is why I highly recommend opening an ISA account as the interest on a cash ISA is free from tax, so whatever interest you accumulate over the year, you keep.
To apply for an ISA, you must be over 18 years old and resident in the UK for tax purposes.
Your ISA allowance for the tax year 2018/19 is £20,000. Your ISA allowance resets at the start of each tax year (on 6 April). The government is in control of this and they may decide to change it or keep it the same, so be sure to stay up to date each tax year! This current allowance means that if you and your partner are married, you can invest up to £40,000 and generate tax-free interest of up to £2,800 per annum.
How many ISA accounts can I have?
The government currently allows you to have up to four different types of ISAs each year. These include:
- Cash ISA
- Lifetime ISA
- Innovative Finance ISA
- Stocks and shares ISA
What are the best uses of an ISA account?
Saving for a home or for your retirement
The government will actually help boost your savings by up to 25% when you save with a Help to Buy ISA or Lifetime ISA. This is something I am using my ISA account for saving towards buying a house this year as I'm planning on buying a home with my husband and this is a fantastic way to both, keep track of our savings goals and to boost our interest on our savings.
You pay the additional rate tax rate
ISAs are very useful if you're an additional rate taxpayer as you won’t have a personal savings allowance if you pay income tax at 45%. When this happens, an ISA is the only type of savings account where you can earn tax-free interest, so bear this in mind when you take into account the tax rate you currently pay.
Always opt to join a flexible ISA account so you have the option to withdraw and pay in your income into your account during the tax year so it isn't counted towards your annual ISA allowance.
IMPORTANT: Please note that this post is not intended for financial advice, and you must speak to a financial advisor before you make any decisions.