ISAs Explained
An ISA is a 'wrapper' for your savings and investments. Once your money has the protection of being held in an ISA, it becomes more tax efficient, so interest or growth can be paid without UK Income Tax or Capital Gains Tax deducted.
How do ISAs differ from regular savings?
An ISA 'wrapper' makes your savings and investments more tax efficient. Without this 'wrapper' they are subject to income and capital gains tax. So it makes financial sense to use your ISA allowance every year.
ISAs come in two forms; a cash ISA and an equity ISA (or stocks and shares ISA). In the past ISAs have been referred to as mini ISAs or maxi ISAs, and TESSAs and PEPs, which they replaced in 1999.
Each year you are able to place £11,280 into an ISA – tax free. You may choose to split this between a cash ISA and an equity ISA, each with a limit of £5,640, or invest the whole £11,280 into an equity ISA. Remember, once you have used your entire ISA allowance you can’t invest any more, even to replace money you have withdrawn from your ISA during that tax year.
Cash vs Equity ISAs
At TQ Invest we can help you invest into an equity ISA. Typically, you can start a cash ISA with a bank or building society.
Cash ISAs maybe for you if:
- You have a short-term view on your savings
- You want to take the least amount of risk with your money
- You're aware that interest paid on cash savings may not always keep up with inflation
Equity ISAs maybe for you if:
- You have a medium to long-term view on your savings
- You're happy to take a degree of risk in search of greater returns
- You're saving for retirement & want investments to supplement your pension income
MYTH: All investments are high risk.
Truth: Whilst there is no such thing as a risk-free investment, not all investments carry the same degree of risk. There are investments that offer lower than average risk with higher returns than you would expect.
QUESTION: Do I need £1,000s to start investing in an ISA?
Answer: In truth, no. You can start investing from as little as £20 per month. Over the years, you will be surprised at how much your investments accumulate this way.
JARGON BUSTER: Wrapper
A wrapper is the name given to a product that savings and investments can be placed into to give them favourable tax treatment.