ISAs, or Individual Savings Accounts, are one of the best ways to shelter your hard earned money away from the tax man.
The process is pretty straightforward. Each tax year, you get an ISA allowance, meaning the maximum amount you can put into your ISA. For the 2018/2019 tax year ending on April 5th 2019, the allowance is £20,000.
Now, this is pretty generous, but let’s look at the implications of putting your savings in different ISA vehicles. Every year, you can allocate your money between a Cash ISA, a Stock and Shares ISA, or the relatively new Innovative Finance ISA. As long as you don’t go over your £20,000 allowance, you could put for example 25% into a Cash ISA, 50% into a Stock and Shares ISA, and 25% into an Innovative Finance ISA, or 100% in one type of ISA.
However, there are a few considerations before you do that. First, the tax savings depend on the return from each ISA. If you were to put £1,000 into a Cash ISA, at current rates you are looking at around 1% for easy access ISAs and 2% for fixed ones, so a pretty small £10 to £20 in interest per year. Paying taxes or not on such a small amount will not make much of a difference on your nest egg.
But if you were to invest your cash into a Stock and Shares or Innovative Finance ISA and earn 8% per year, you would get £80 tax free.
The next thing to note is ISAs are growing tax free forever, as long as you do not withdraw your money. So if you put £10,000 into your ISA in April, but then need to access £2,000 for an emergency in June, you can only put a subsequent £10,000 into your ISA and not £12,000. The same goes if you want to transfer your ISA from one provider to the other, you cannot withdraw the money, you need to ask the new provider to get it from the old one or you would lose the tax benefits.
So to sum it up, it makes more sense to invest money you can afford to leave there for the long term, or, at the end of the year, if you haven’t used all of your allowance, put the rest of your savings into an easy access cash ISA if you think you might need it soon.
If you decide to invest in stocks, peer-to-peer lending and other innovative finance vehicles, remember that your money can be at risk. If the markets take a dip, and you cannot wait for them to bounce back, you may end up with less money than initially invested. If a peer-to-peer loan defaults, you may lose your money. As usual, it is all about the level of risk you are comfortable with to get a potential higher reward.
There are many companies offering an array of investing options. Just ISA for example, specializes in litigation funding ISAs. Just requires a minimum funding of £2,000 and offers 8% interest p.a., with the option to transfer money from your existing cash or stock and shares ISA. If you were to invest the full £20,000 allowance into it, you would get £1,600 per year in tax free interest. A saving of £640 if you are in the 40% tax band.
You still have a little over three months to use your ISA allowance or it is gone forever. So try to make the most of it depending on your financial goals and needs.