How to Use an ISA for Tax Free Savings

In the UK, an individual savings account, or ISA, is an often overlooked means to tax free savings. In the past the rules and details of an ISA were complex, but recently the UK government has been working to make the ISA more appealing to a broad range of consumers and have simplified the issue considerably.

What is an ISA?

An individual savings account is not actually in an investment in its own right. It is the name that can be applied to other groups of investments – a wrapper if you like. The ISA wrapper is good for up to £7,200 a year in cash and stocks and shares. When you save money in products within an ISA, you are able to grow your investment tax free. ISA rates vary among products, but the interest earned on your investments are not taxed for income or capital gains. This can work out to be a sizable savings.

Starting an ISA

You can start saving in an ISA as young as 16, but you will be limited to a Cash ISA and can only save £3,600 through the label. When you reach 18, you’ll be able to open a Stocks and Shares ISA that has a maximum of £7,200 per year. You can have both types of ISA accounts, but are limited to a total of £7,200 between the two with the maximum in the Cash ISA of £3,600 per year. You can, however, transfer funds between the two types of accounts provided you move all of the year’s investment at a given time.

Additional ISA Savings

Not only will an ISA earn you considerable tax savings, it might also offer you a break on administrative fees. Many banks and investments like to be part of ISAs, so they might very well offer a discounted rate for fund management or initial investments if you put your money into an ISA versus a traditional savings account or investment.

Easy Step By Step

• Speak to a bank, building society or investment house to determine what savings options they have under the ISA wrapper.
• Negotiate a discounted rate for management and initial purchase if possible and invest up to £7,200 in your new ISA accounts.
• Enjoy watching your funds grow without tax penalties. They will grow even faster if you continue to make the yearly investment with protected tax savings.

Warnings, Advice, and Suggestions

Even if you can’t afford to save the full amount every year, invest what you can in accounts under the ISA wrapper. The tax savings are not something to be trifled with.

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