What is an ISA?
Published Wed, Mar 9, 2011 Updated Tue, Feb 16, 2021
Everybody knows that they should save for that rainy day but knowing where to start can be like trying to dodge a whirlwind.
The government gives an allowance to individuals each year on how much they are able to save tax free and anything above this amount is taxed. An ISA is simply a tax-free savings account provided by a number of different banks.
Shop around for the best ISA
Like with any other account it is important to shop around for the best deal. Different banks offer different interest rates but regardless of the bank each individual is entitled to save the same amount per tax year tax free.
The saying if you snooze you lose applies here – the allowance does not carry over to the next year so make sure you take advantage of it this and every year!
Earn more interest
ISAs are just like other normal savings accounts in that you have access to take money out whenever you want but the advantage of an ISA is that the interest you earn on your money is not taxed by the government at the usual 20% tax rate (40% for higher rate taxpayers). Whatever you save in that tax year remains interest free from then on.
To give an example; If you were to save £300 a month in your ISA for 10 years with an interest rate of 3.0% you would earn over £1400 more in interest than in a normal savings account at the same rate.
The most crucial thing to understand about an ISA is that once you have withdrawn money that money can not be returned without being part of your allowance. For example; If you were to save your £4100 within the first six months of the tax year then the following month decided to withdraw £1000.
If you were to pay that £1000 back into your ISA the following month you would have reached your annual £5100 tax free limit.
If you are taking advantage of the ISA option remember that although you can only open one ISA in a tax year, once that tax year has finished there is nothing to stop you opening a new ISA account.
In a UK regulated bank (not necessarily a bank that trades in the UK) your savings are safe up to the value of £85,000 so if you are a keen saver and have over this amount make sure your money is split between providers to ensure if the worst happens you don’t lose your savings.