Saving money is, on the face of it, a simple enough task. Balancing the books in favour of your long-term financial security should be a breeze, but the road to financial literacy is a nonetheless bumpy one. Between economic uncertainty and confusing language, it can be hard for a layperson to use all the tools available to them on their journey to financial wellness.
One key example of this comes in the form of the ISA. When used correctly, ISAs can save you a great deal of money each year – and even subsidise some of life’s bigger costs. What should you know about them?
What is an ISA?
ISA stands for Individual Savings Account, and describes a unique cluster of financial products that enable you to avail of some key benefits and boons. There are numerous benefits related to different forms of ISA, but the main benefit comes in the form of tax exemption. For the unaware: when savings accrue interest, that interest is taxable at an individual’s given Income Tax rate.
Most people do not experience this tax exemption, thanks to something called a Personal Savings Allowance (which allows you up to £1000 in tax-free interest earnings annually). ISAs allow you to earn interest above and beyond this threshold, without losing anything to taxation. The same exemption applies to capital gains on investments made through a Stocks and Shares ISA. So, how should you engage with ISAs?
The Dos
Do Seek Out Higher Interest Rates
In form and function, ISAs are just like conventional savings accounts, and hence can be treated as such in your budgeting plans. This means you don’t need to settle for an ISA with your existing bank or building society – nor do you need to stick with whichever provider you choose.
Do Use Multiple ISAs
ISAs come in different shapes and forms, and you can utilise the benefits from any – or indeed, all – of them simultaneously. For example, Lifetime ISAs enable you to save money towards a first home or to retirement, with a 25% government-subsidised bonus on up to £4000 annually; this can be used alongside a conventional ISA for additional savings.
The Don’ts
Don’t Exceed Your Annual Allowance
However, the main limiting factor for ISA usage is the ISA Allowance. This is the maximum amount of money that an individual can stow away in ISAs each year, which is currently set at £20,000. This allowance can be spread across multiple different ISAs, provided they are not of the same type – which increases your risk of exposure to exceeding the allowance. Individual providers will often prevent you from going over your allowance, but in the event that your money is split across sources, this becomes impossible.
