It is currently ‘ISA season’, which means savers are either scrambling to ‘use it or lose it’ in regards to the ISA allowance which runs out at midnight on April 5, or they are looking ahead to the new tax year to decide which ISA could work best for them.
ISAs have changed over the years, as ‘ISA season’ was first coined during the early days when the allowance was a lot smaller. The ISA allowance is how much money you can put in an ISA each tax year, and when this type of savings account was launched in 1999, that was £3,000. The allowance then slowly rose to £5,100 in 2010, which was a sensible amount that someone could save in a year - hence the ‘use it or lose it’ rhetoric when we reach the end of March.
However these days, the allowance is now £20,000 which made the ‘use it or lose it’ slightly more obtuse as - during a cost of living crisis - not many people would be able to save this amount during a year. This is also coupled with the fact that everyone gets a personal savings allowance, which means basic rate tax-payers can earn up to £1,000 in interest a year before they are taxed.
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And that’s the thing about ISAs, the main selling point has always been that it acts as a vehicle to save money and avoid income tax and capital gains tax.
But that doesn’t mean ISAs have no role to play - the ISA market is very diverse and it’s been an interesting 12 months, as interest rates have risen making them more attractive.
And while you might struggle to find £20,000 to put away in a year for a cash ISA, annual subscription limits for junior ISAs and Child Trust Fund accounts are still £9,000 and lifetime ISAs only allow £4,000 to be added a year.
So, should you consider an ISA in the new tax year? Let’s look at what’s on offer and remember, you can only put up to £20,000 into one of each type of ISA; cash ISA, stocks and shares ISA, lifetime ISA, junior ISA and innovative finance ISA. Plus, ISAs can only be held in one person's name, so you can’t have a joint ISA.
Cash ISAs are attractive to savers as it offers them a place to deposit their savings and earn interest tax-free. However, due to the personal savings allowance, a cash ISA works best for someone who is already paying tax on their savings or nearly at the limit of the PSA. Cash ISAs are also more flexible than other options as you can often access the money for any reason. On the flip side, even the best cash ISA interest rates are generally still lower than inflation.
To open an cash ISA you have to be 16 or older
Stocks and shares ISAs let you put money into shares and other investments without paying income tax or capital gains tax on the growth. You can also choose exactly what you want to invest in, from stocks or shares, investment funds to unit trusts. Bear in mind that returns could be far higher than with a cash ISA, but the value of your money could also fall if your investments do not perform well.
An innovative finance ISA works differently to other ISAs as it focuses on investing in peer-to-peer (P2P) lending. P2P lending allows you to lend money directly to borrowers and businesses by using an online portal for the exchange of cash. The borrowers then pay back the borrowed amount and interest is added on. The interest is the return you get on your investment and you earn this tax-free.
To open a stocks and shares ISA or a innovative finance ISA you have to be 18
Lifetime ISAs are best suited for first-time buyers or anyone looking to save for their retirement. If you save the money for these two purposes then you are rewarded by the government as it adds 25% to the first £4,000 you save each year.
But there are conditions attached. Only people aged between 18 and 40 can open one and you only get the government bonus cash if you use the money to buy your first home or withdraw it after you turn 60. If you meet those conditions, you’ll receive £1,000 a year extra cash simply by saving in the right place.
To open a lifetime ISA you have to be between 18 and 39
A junior ISA is a long-term and tax-free way for parents or guardians to invest money for their child's future. However, the money you add into this savings account is locked away until the child's 18th birthday, and only then can it be accessed by the child. The junior ISA allowance is £9,000 which can be used during the next tax year. You can also choose between a junior stocks and shares ISA and a junior cash ISA.
To open a junior ISA you have to be the parent or guardian of a child under 18
As a trained journalist, Lucinda has spent the past 10 years writing and editing content for regional and national titles, including The Mirror, WalesOnline and Manchester Evening News. She is now a personal finance editor and specialises in savings, helping people to make confident financial decisions so they can save for what matters most.