In the last period, ISA is the financial instrument chosen by hundreds of people living in the UK. But what are the features of this account? What are the tax advantages available? Here is a complete analysis of it.
First of all, it is essential to know what ISA means. Well, it is an acronym and it stands for Individual Savings Account. Why is this account preferred over others? Because it offers tax-free rates. Essentially, this means that an investor does not pay tax on his returns, if he (or she) does not exceed the annual allowance.
There are two base types of ISAs. Let’s analyse them.
What are the two ISAs types?
The first type is Cash ISA. An investor can manage such an account independently. Anyone can open an ISA with a few pounds. Also, holders of an ISA can deposit new money into the account at any time. At the same time, those who need money can usually draw on cash ISA funds, but it depends on the type of ISA. In this way, you can have your savings under control, managing them better.
Then there are stocks and shares ISAs. The latter is a sort of wrapper around investments made of bonds, assets, shares and so on. Anyway, those who choose stocks and shares ISAs do not have to pay taxes on growth, interests, incomes, or dividends. However, stock and shares ISAs are subjected to the volatility of financial markets so your capital is at risk and it may grow as well as go down.
Stocks and shares ISAs have the potential for a strong return on investments. However, please note that no investment guarantees a safe income, so it is good to calmly analyse any possibility before opening any type of ISAs.
What are the limitations of an ISA?
There are some limitations regarding ISAs: first of all, an investor should know what the ISA allowance is. It is about the most you can save in your account and this limit cannot be exceeded during a tax year. Each year, the ISA allowance is updated according to tax rules. Indeed, right now, the ISA allowance is set at £20,000.
Regardless, in some cases, you could use ISA flexibility. What is it? It’s a feature that helps you replace the money in your account without adding it to your ISA allowance.
In addition, you must remember that you are only able to open one type of each ISA variant in a tax year. This means that if you have already opened a stock and share ISA in a tax year, you can open a Cash ISA in the same year, but you will be not able to open another stocks and shares ISA.
Lifetime ISA: what is it?
Sometimes you hear about Lifetime ISA. What is it? It is another type of Individual Savings Account. A Lifetime ISA, often shortened to LISA, is a financial tool created to help those who want to save money for long-term projects.
In detail, this account is the ideal solution for those who want to save money to buy their first house or to enjoy their retirement. Investors could put in up to £4,000 each year and in addition, the Government will add a 25% bonus of what you pay up to a maximum of £1,000 per year.