The Importance of the ISA

An individual Savings Account (ISA) is a tax-efficient method of saving and can come in various forms. In recent years, more products have become available to invest in under an ISA wrapper, to appeal to more consumers. These include structured products, Venture Capital Trusts (VCTs) and Alternative Investment Market (AIM) products. All of these benefit from tax-free growth and income and show that ISAs have something for every type of client, regardless of age, financial goal or attitude to risk.

The ISA allowance for any one tax year is currently £20,000 per individual and any growth or income from an ISA is completely tax-free. As growth and income from the ISA are tax-free, it protects your money from income and capital gains tax. The ISA wrapper allows you to capitalise in stocks and shares and many other investment types, or simply hold cash. It is important to note that your annual ISA allowances cannot be accumulated, so if you have not utilised your allowance at the end of the tax year, you lose it, and it refreshes for the new tax year.

One form of ISA is the Lifetime ISA (LISA), in which you can currently invest up to £4,000 per tax year (leaving you with a £16,000 allowance remaining for other ISAs). These have the same tax efficiencies as any other ISA but can only be used for retirement planning or a first house purchase without incurring a charge. One benefit of this type of ISA is a 25% government bonus on top of your investment amount, meaning your £4,000 investment becomes £5,000 before even taking investment growth or interest into account. To open a LISA, you must be age 18 or over but under 40 years old and you can contribute to a LISA until you are age 50.

The current economic climate means that the need for effective financial planning has never been greater. Studies such as that by David Miles and Victoria Monro (2021) highlight the current peak in house prices and income statistics make it nearly impossible for so many of the population to get onto the property ladder. Charts evident in the Adkins et al (2019) study illustrate this increase in average house price, proportional to the average salary.

With this in mind, it is vital to ensure that individuals are taking advantage of every available financial tool to put themselves in the best possible position to reach their goals. The LISA replaced the previous ‘help to buy’ ISA and is an attractive option for anyone with a goal of purchasing their first property.

As previously indicated, the LISA can work alongside normal ISA contributions, so contributing the maximum amount into your LISA will still leave you with £16,000 of your allowance available for further investments into an ISA wrapper. These can be cash ISAs, available through many High Street banks, which will earn tax-free interest on your savings and be readily accessible if needed. To open a cash ISA, you must be age 16 or over and a UK resident. These further investments can also be stocks and shares ISAs, which can produce growth that will be free from Capital Gains Tax (CGT), or they can be set up to provide additional income that will be free from income tax. To open a stocks and shares ISA you must be age 18 or over and a UK resident.

Following Pension contributions, ISAs are seen by many as the next most important investment and there is something for all types of investors. Even under 16’s can be catered for, using the Junior ISA (JISA). These are available in the form of stocks and shares JISAs and Cash JISAs and are available to all under 18’s who live in the UK. The annual allowance is currently £9,000 per tax year.

If you would like any further advice on this topic, please do not hesitate to contact Birkett Long IFA on 01206 217309 or email kate.barnett@birkettlong.co.uk.

References

Miles, D. and Monro, V. (2021) UK house prices and three decades of decline in the risk-free real interest rate, Economic Policy. Oxford Academic. Available at: https://academic.oup.com/economicpolicy/article-abstract/36/108/627/6132315 (Accessed: November 1, 2022).

Adkins, Lisa & Cooper, Melinda & Konings, Martijn. (2019). Class in the 21st century: Asset inflation and the new logic of inequality. Environment and Planning A: Economy and Space. Page 53.