Lost in the Isa maze? The five different sorts of Isa explained
Isas used to be so simple: they just presented a tax-free way to save or invest. And that’s still the case. But there’s a few more options on top now.
Isa stands for individual savings account, and in this tax year you have an allowance of £20,000 that can be used for one Isa or split across more than one.
That means you can save or invest up to £20,000 without paying any income tax on interest you earn or any capital gains tax on profits you make from investing. Bear in mind tax treatment depends on the individual circumstances and may be subject to change in future.
These are the five different sorts of Isa that could provide a home for your spare cash.
These are the basic Isas offered by banks and building societies, which are just savings accounts where you put your money to earn interest. Isas that allow immediate access to your cash ("easy access") pay lower rates of interest than those that require you to lock away your cash for a year or more ("fixed rate"). Like standard savings accounts, interest rates are as low as they have been in living memory - you will be lucky to get 1.5% even if you go for a one-year fix. Something called the personal savings allowance means that you can actually earn interest up to £2,000 tax-free from a standard savings account. All savings accounts are covered by the Financial Services Compensation Scheme, which protects up to £85,000 per provider in case it collapses (and this did happen in the last financial crisis!).
Investing or stocks & shares Isa
These you open through something called an investing platform. It is an account that allows you to buy shares or to invest in funds and not pay any tax on the returns you earn. This means no tax on either the income you get from dividends or bond interest, or the profit you make from the value of your investments rising. The investing platform that you open your Isa with will charge a fee, but they vary widely in how they do this – some making one-off charges, some charging per transaction. So study the fee structure to see which suits you. Note that these fees come on top of those charged by any funds you invest in – so any returns you make will have a chunk eaten away by all this.
Help to buy Isa
These are aimed at first-time buyers as the government will give you a 25% bonus to your savings when they are used as a deposit to buy a home.
They are offered by banks and building societies, and you can open one if you have never owned a property.
You can kickstart your account by sticking a lump sum of up to £1,200 in the first month, then you can save up to £200 a month from then on.
When you come to put a deposit down on a property (which cannot be priced at more than £250,000 or £450,000 in London), you can receive a maximum bonus of £3,000 if you have saved at least £12,000.
Help to buy Isas are not to be confused with the Government’s Help to buy loan scheme, and will not be available after November 30 2019.
This new Isa has a dual purpose - to fund a first-time property purchase and save for retirement.
You can put £4,000 a year into a Lifetime Isa, which will be topped up with a 25% government bonus, making a total of £5,000. You have to be over 18 and under 40 to open an account but contributions - including the bonus - are paid until your 50th birthday.
If you invested the full amount from 18 to 50 you would receive £32,000 in government bonuses. However, you can only take out your cash penalty free from age 60 or if using it for a deposit on your first property.
Innovative finance Isa
Innovative finance Isas let you put your savings with peer-to-peer lenders or invest in companies through crowdfunding websites.
The accounts cut out the banks — so you lend directly to a borrower for a better return. But they are riskier.
Your money is not covered by the Financial Services Compensation Scheme if the borrower defaults or the provider collapses. The value of investments and any income from them may go down. You may not get back the amounts originally invested.
Read more: Your two-minute guide to Isas