Some decisions in investing are relatively complicated. Such as what to investments buy and when and how to buy them. However, fortunately there is one aspect of investing that is actually fairly straightforward and helpful for most people.
Imagine if the government said if it was ok for you not to pay tax on any investment gains and income on your investments. Wouldn't that be good news? Well, basically that's the deal you receive with an ISA (Individual Savings Account).
ISAs come in different types depending on what sort of saving or investing you're doing and what you're saving for. However, the main theme of all of them is that you don't pay tax on the money that's in the ISA when it grows, and you typically don't pay tax on the money when it comes out either if you follow the rules (a specific type of ISA called a LISA can be an exception, but we'll get to that).
So an ISA is like a giant tax shield for your money. Now, of course there's always a slight catch, and with ISAs the catch is that you are only allowed to put a certain amount of money in an ISA each tax year (April to April). For this tax year (2017/18) the limit for adults is £20,000, and that could change in future. Of course, contributing less than the ISA limit in the tax year is fine.
Plus remember that's an annual amount, so even if you're wealthy and the maximum limit impacts you, remember that by saving consistently into an ISA over a period of tax years, you can save a large amount of money.
For most UK savers it seems that if you are saving, they should, in our view, be done through an ISA due to the tax benefits relative to a general investing account. It's pretty simple really - your money grows faster if you don't pay tax on investment gains and income.
Different Flavours Of ISA
That's the simple part over. Basically with an ISA you get to keep more of your money rather than pay some of it in tax. Where it gets complicated is that there are different types of ISA for different investment goals and depending on what you're investing in:
- Cash ISAs - These offer potentially lower return, but relatively secure tax-free interest payments.
- Help to buy ISAs - For your first home.
- Stocks and shares ISAs For investing in the stock market (we offer one of these at Moola).
- Innovative finance ISAs - For peer to peer lending and other newer sorts of investing.
- Junior ISAs - For those under 18.
- Lifetime ISAs - Which are new and serve a dual purpose in helping with your first home purchase and/or retirement. Note that Lifetime ISAs are a bit more complicated than the average ISA and come with a few more rules and benefits.
That's just a current list, the types and rules could easily change in future. Nonetheless, though the type of ISAs can be a little confusing, we do think it's worth picking one, perhaps after getting professional advice, if you're a saver. This is because having your investments grow tax-free is generally a good idea.
Also, there aren't typically any limits on withdrawal, generally speaking, you need the money, most ISAs (the main exception is the LISA) typically doesn't place any major constraints on taking it back. Many investing decisions are relatively complicated, but we do think investing via an ISA is potentially one of simpler and better investing decisions out there.