What is an ISAs and How Do They Work?

What is an ISAs and How Do They Work

There are many different investments you could be exploring for your finances, depending on your specific financial situation.

That being said, one investment type, in particular, you should be considering is an Individual Savings Account (ISA).

In this article, you’ll learn what an ISA is and how these investments work for your finances.

Read on to find out more.

What is an ISA?

An ISA is a certain type of investment account that allows you to grow your savings whilst sheltering them from tax.

Each year, you’re able to contribute a certain amount of money to your ISA, tax-free, and this is determined by the annual ISA allowance. For the current tax year 2023/2024, the ISA allowance is £20,000.

What is an ISA

When you choose to withdraw money from your ISA, this can also be done without paying any tax.

ISAs are a popular investment opportunity for various financial situations to help you build your wealth tax-efficiently.

How do ISAs work?

There are four different types of ISA you can invest in, and each one works slightly differently:

Cash ISA

A cash ISA is your standard account type where you can save cash away each tax year, and grow your savings. Any amount you use up to your allowance can be saved and withdrawn tax-free. You can also receive tax-free interest on your savings.

These ISAs are ideal for setting money aside each year for your financial goals, knowing the savings are sheltered from tax.

Lifetime ISA

A lifetime ISA is specifically designed to help with buying your first home. Each year, you can contribute money to this ISA, and when you want to buy your first home, this money can be withdrawn tax-free.

You can only contribute £4,000 to your Lifetime ISA each year. On top of this, you’ll receive a 25% government bonus. This means if you invest the full amount each year, this is £5,000 worth of tax-free savings for your first home.

Lifetime ISA

Your Lifetime ISA can contain a combination of cash and stocks to grow your savings efficiently.

You can only open a Lifetime ISA if you are over 18 and under 40, and once you reach 50 you cannot contribute any more or receive your bonus.

Withdrawing money from your ISA before you buy your first home will result in a 25% tax charge. If you reach 60 or become terminally ill with less than 12 months to live, you can withdraw your money tax-free.

Stocks and shares ISA

A stocks and shares ISA allows you to not only save your money but invest it in a variety of securities to potentially grow your savings efficiently.

You can contact your ISA provider to choose what type of investments you’d like to make with your money – such as corporate shares, investment trusts, exchange-traded funds (ETFs), and more.

The growth that results from your successful investments will also be applied tax-free to your savings, meaning you won’t need to pay income tax or Capital Gains Tax (CGT) on these returns.

Innovative finance ISA

An innovative finance ISA allows you to invest in an account to utilise a peer-to-peer lending network.

This involves you lending cash to borrowers – whether that be companies, investors, etc. – and them paying you back with interest on top.

The benefit of this ISA type is that you tend to earn much higher interest that is tax-free, to grow your wealth.

Innovative finance ISA

However, it’s important to know that your money is at risk, and you should speak to your wealth manager to determine whether this option presents an appropriate risk level for your financial situation.

Now you have a clear understanding of how ISAs work for your finances, make sure you contact your modern wealth manager to begin exploring how these investments could help your current financial situation.

Please note, the value of your investments can go down as well as up.