Do I Still Need an ISA?
If you’re not sure if an Isa is worth the hassle, it’s helpful to ask: “What would I be investing in?” and “Why do I need a tax break?”.
The most straightforward answer is that investments are risky. You never know how they’ll perform over time – but at least with an Isa, your earnings won’t be taxed so long as they stay within the account.
If you want to boost your savings by 20%, this could be a good option for earning more without paying any taxes until later down the line when it might have grown enough or become profitable. Why invest? There’s nothing wrong with keeping all of your money safe and sound under lock-and-key!
You may also want to use an Isa if you want a place to store your pension, which is taxed separately and at different rates.
How Does the Personal Savings Allowance Work?
You may be able to earn up to £1200 in interest each year without paying any tax on it. If you have an annual income of between £100,000 and £123,700, then the personal savings allowance will reduce by 50p for every pound that your earnings exceed this amount.
The point at which you’ll no longer qualify is known as the basic rate threshold (currently set at £34,500), so if your salary is more than this figure, then those contributions can’t count towards the personal savings allowance.
The more you save, the more tax-free interest you can earn on it! You may also be able to claim a 20% government bonus from your provider or an additional 25% if you’re under 40 years old.
These bonuses are usually added at the end of each year and paid as cash – so they’ve been included in these calculations too. The rates change every April with inflation.
Should You Ditch Cash ISAs?
The first thing to consider is the savings tax allowances. If you don’t have a pension, your ISA contributions can go up to £20,000 each year (or £30,000 if over 40).
Each person would have an individual personal savings allowance on top of that – so, for example, if your salary was low enough, then you could continue saving into one without having any impact from this threshold.
But as soon as those earnings exceed, it will reduce by 50p for every pound that exceeds the limit.
The next thing to consider is that if you plan on using your money in the same year, ISAs1 can’t be touched until April of the following year.
Let me explain,
For example, this limit applies whether it’s a lump sum or regular monthly contributions. Alternatively, when looking at other savings accounts, there are exceptions such as notice periods and withdrawal penalties which vary depending on what account type you choose (interest-earning versus instant access).
The final point to note here is that if you withdraw any funds before age 60, those earnings will count toward income tax rather than capital gains.
So whilst cash savings rates might have reached their peak now, ISAs provide some of the most attractive interest rates currently available with no restrictions attached.
What does this mean for you?
This means that you’re free to withdraw or use your funds whenever it suits, without any tax charge.
ISAs Future-Proof Your Savings
There is a widespread opinion that when the next recession hits, savings rates will go up. This means it’s essential to start saving now so you can take advantage of these higher interest rates in future.
In contrast with other types of accounts such as fixed-rate bonds and instant access products, ISAs are automatically protected against any changes to Bank Rate.
You might be able to receive tax relief on your savings through an individual savings account (ISA). The government may add 25% or 30% back onto what you have put into the account by giving this money in cash at the end of each year – after deducting any income taxes due for withdrawals made during that same tax year.
But if capital gains aren’t taxed (not the case for most things, but you may be able to take advantage of this principle via ISAs), then there’s no tax relief.
ISAs Are More Flexible (But Check Your Provider)
Some flexible ISAs allow you to withdraw and replace your money. This means that if rates are about to go up, then drawing the funds could be a good idea.
You can only save £20,000 in an ISA each year – but this limit isn’t per account; it’s across all of them so long as the same person holds them with one provider.
ISAs come in two types: cash or stocks and shares2 (you choose which kind when opening)
The maximum yearly tax-free contributions for cash Isa accounts is £20,000 (£15,240 from April 2019) while stocks and shares Isa limits vary depending on how old you are at the time of investment – anyone aged 18-29 can invest up to £200,000 while those aged 30-49 can invest £50,0000 and people over the age of 50 have no limit.
The ISA Transfer Limit is £15,240 for cash Isas from April 2019. This means you will be able to transfer your money in increments under this amount – but any more than that could mean dipping into capital gains tax or inheritance tax if done within a single year.
Couples Can Inherit Each Other’s Isa Allowance
For couples, the total amount of cash Isa savings that can be held in both partners’ accounts cannot exceed £20,000.
You can make additional annual contributions, but they will not count towards your lifetime allowance, and you may have to pay higher rates of inheritance tax on any eventual death.
The maximum yearly tax-free contribution for stocks and shares ISA is £200,000 (£150,460 from April 2019) while those aged under 18 should limit their investment so it does not exceed £50,0000 as this would disqualify them from certain benefits such as student loans or social security payments.
If an individual turns 50 before December 31st each year then no further investments can be made until January next year when they qualify again.
Keep an Eye on Falling Savings Rates
As long as your money is held in cash or a deposit account, then your savings will be earning you interest.
The bank rate has been going up for the last 30 years, but it’s now at 0.75%, and there are predictions that this could go even higher, which means lower rates of return on any investment.
Suppose inflation stays high (which many economists predict). In that case, the value of our saving may not keep pace with both inflation and rising prices – meaning we’re effectively losing out through negative, accurate interest rates.
You might want to consider moving some funds into riskier investments such as stocks if they have performed well so far. Remember that those risks should also apply to your rainy day fund.
How Much Can I Save in an ISA Each Year?
It gets better,
A maximum of £15,240 per year can be saved in an Isa. This limit is calculated as follows: £11,880 (tax-free allowance from 2018/19) + the amount you don’t use up on your Personal Savings Allowance (£1100). You need to set this money aside each tax year, and it must stay there until retirement day or else any earnings will become taxable income.
What Are the Benefits of an ISA?
The benefits of an Isa are that the money you save in it is tax-free, meaning your savings won’t be taxed when they’re invested. You will also receive a 25% bonus from the government for up to £4000 per year if you start making contributions before April 2019.
What should I do with my ISA?
The general rule is to put your savings into cash or a short-term fixed interest account.
Is It a Good Time to Get an ISA?
It’s never the wrong time to get an ISA, but if you’re not sure, it may be worth waiting and seeing what happens in the future.
Are ISAs Safe at the Moment?
The answer to this question depends on the level of risk you’re willing to take. If your savings are for a short-term goal and if there’s no significant economic event forecast shortly, then it may be worth keeping your money in an ISA account with one of the providers we list here.
Isas are still worthwhile as long as you have sufficient income and don’t need the money immediately. The more time that passes before you use your Isa savings, the better it is for you because of compound interest. You should invest in a good mix of stocks or funds to achieve diversification so that your losses will be minimized if there’s an economic downturn.