Buying a house is a big commitment and saving a good deposit will help you get the best mortgage. Make sure you take good financial advice to take advantage of government schemes and tax efficient savings to boost your deposit.
An ISA is a tax free savings account, which stands for individual savings account (ISA). Here is a simple guide to help you understand the difference and choose the right product for you.
What is an ISA?
An ISA lets you earn interest without paying any income tax. You are limited to how much you can put into an ISA every tax year. This is called you ISA allowance which you can save money without paying tax on your returns.
Your ISA allowance for the 2020/21 tax year is £20,000. The tax year runs from the 6th April to the 5th April the following year.
You need to use your ISA allowance by 5th April 2021.
You are given a new ISA allowance at the start of every new tax year.
Remember that you cannot carry forward any unused ISA allowance to the next year.
How much tax do you save when using an ISA?
If you are a basic rate taxpayer, a higher rate taxpayer or an additional rate taxpayer, you will not pay any income tax on money saved in an ISA, providing you do not pay in more than your allowance each tax year.
Here is an example of Income tax on ISAs:
Basic rate 20%* 0%
Higher rate 40%* 0%
Additional rate 45% 0%
*This is after exceeding personal savings allowance.
To open an ISA you must:
Be 16 or older (18 for stocks and shares ISA)*
Be a resident in the UK
Have a national insurance number
* Except for Junior ISAs.
ISAs cannot be held in joint names.
What kind of ISAs are there?
There are two main types of ISA:
Cash ISA and a stocks and shares ISA. There are also some specialist ISAs available on the market which your bank or financial advisor can tell you about.
Instant access: You can withdraw and deposit funds* as often as you want
Fixed term: You deposit money and tie it up for a fixed term
* This is up to to your full ISA allowance
Stocks and shares ISAs
Stocks and shares ISAs are essentially stocks and shares investment accounts which use your ISA allowance to make them tax efficient.
As with all stock investments your money is at risk but your returns could also be bigger.
Junior ISA: For children only
Lifetime ISA: For adults under 40 saving for retirement or to buy first home.
Innovative finance ISA: Speak to your financial advisor.
Always speak to an Independent Financial Advisor before making any significant financial decisions.
Interested in finding out more about the best ISA for you?