ISAs explained
Beth Harris, The Co-operative Investments’ ISA Expert, talks to us about ISAs, and how these can be the best type of investments for both novice and experienced investors alike.
Everybody’s talking about ISAs
ISAs are a simple and rewarding way to save - the Government’s way of encouraging people to invest for their future. Perhaps you remember TESSAs and PEPs? Or Mini and Maxi ISAs? It was all a bit confusing, but thankfully, it’s much simpler now.
Each tax year UK residents are entitled to one ISA, which is split into two halves – the cash ISA and the stocks & shares ISA. The ISA allowance for the current tax year is £10,680 per person, and you can invest in either a cash ISA, a stocks & shares ISA, or both.
| How much you can save… | Have you used your whole ISA allowance? | ||
|---|---|---|---|
| Cash ISA | ONLY | up to £5,340 per tax year | This is only half your £10,680 total ISA allowance. |
| Stocks & Shares ISAs | EITHER | up to £5,340 per tax year | Even if you save the maximum in a Cash ISA (£5,340), you still have the rest of you ISA allowance to invest in a Stocks & Shares ISA, another £5,340. If you save less than £5,340 in the Cash ISA, all the rest of your total ISA allowance (up to £10,680) is available for Stocks & Shares. |
| OR | up to £10,680 per tax year | You can invest all of your £10,680 ISA allowance in a Stocks and Shares ISA. Make sure you have enough savings put by in cash accounts, just in case you need it. |
What does tax-efficient saving really mean?
In short, it means you don’t pay any further tax on what you earn from your ISA.
- A cash ISA is basically just a savings account, so you’ll receive a rate of interest on your savings (either a fixed or variable-rate). Any interest is paid to you ‘gross’, so your returns are ‘tax-free’.
- Stocks & shares ISAs are an investment, so instead of paying a ‘rate of interest’ your investment is designed to increase in value. Some investments allow you to receive the investment growth regularly as an ‘income’, and others pay any growth to you when you withdraw your money. Any income or growth from a stocks and shares ISA is exempt from both income tax and capital gains tax, so a stocks & shares ISA is ‘tax-efficient’.
You should be aware that tax laws in the UK may change and the favourable tax treatment of ISAs may not be maintained in the future.
Ways of investing in an ISA
You can open a cash ISA with one ISA provider each tax year, generally they pay a rate of interest and are designed for saving for the short to medium term (less than 5 years).
Cash ISAs are available from Britannia and The Co-operative Bank
Stocks & shares ISAs are normally offered as investments in a particular investment fund, like a unit trust. The money you invest in that investment fund is then given an ‘ISA wrapper’, like an umbrella shielding any earnings from the tax man. These are generally for medium to long-term investments (5 years or longer).
The Co-operative Investments offers stocks & shares ISAs through our range of Unit Trust funds.
Use your whole ISA allowance
It’s yours, so you might as well use it! You can only invest up to £5,340 this tax year in a cash ISA, which is only half of your total ISA allowance.
- If you have a smaller amount of money you’d like to save each month (say, less than £100) or you don’t have much of your savings in cash accounts already, then a cash ISA would probably be a good place to start.
- If you have a larger amount of money to put away (either a lump sum or a regular investment), then a Stocks & Shares ISA is worth considering.
- These days, cash ISA interest rates are generally quite low over the longer term, so if you want to make your savings work as hard as possible for you, a stocks & shares ISA may be a better option.
Transferring your ISA
You can turn cash ISAs, which you may have saved in previous tax years, into stocks & shares ISAs without losing the ISA tax-status.
You can’t transfer a stocks & shares ISA back into a cash ISA though, so make sure you have enough cash savings, in case you need them.
You can also transfer ISAs for the current tax year to another ISA provider if you’re not happy with the way it’s performing. Make sure you understand the terms and conditions of the ISA before you do this, as some providers may have penalties for doing so.
If you’d like to transfer either your cash ISA or stocks & shares ISA to The Co-operative Investments' stocks & shares ISA, call us on 08457 46 46 46 and we’ll explain how.
