ISAs (individual saving accounts) are a simple way to protect your savings and investments from tax. Everyone can save up to £20,000 each year into an ISA; this can be cash or stocks & shares, or a mixture of both. If you are not using your allowance you could end up paying too much tax.
If you are saving on a regular basis it usually makes sense to use your ISA allowance. If you don’t use the allowance each year you lose it.
If you use an ISA for your cash savings you will not have to pay any tax on the interest you receive. With interest rates currently very low, this can seem a bit pointless if you don’t have a lot of savings. However, interest rates should eventually rise, which means you will have more tax to pay, particularly as your savings increase over the years.
Using an ISA to hold stock market investments means there is no capital gains tax to pay when you sell your holdings and there is no tax to pay on any income you receive. If you already own shares or other investments standing at a profit it is possible to use your annual capital gains allowance to sell these and buy the same investments back through your ISA the next day. This has two advantages:
- you are using your annual tax-free allowance; and
- moving your investments into a tax-advantaged shelter.