An ISA (or Individual Savings Account) is a common legal way to save money without paying tax on the interest you earn. The amount you can place into an ISA is set by the UK government and changes each year with the new allowance coming into effect at the start of the tax year on 6th April.
There are two different ISA savings limits, one for standard ISAs and lower limit for Junior ISAs (open to people under the age of 18).
Providers do not normally allow you to exceed this limit, so if you were to accidentally attempt to pay too much into an ISA, the payment should simply be rejected outright or quickly refunded back into the account you paid in from.
How much is the ISA allowance for 2017/18?
HMRC set the following ISA limits for the 2017-2018 tax year:
- ISA - £20,000
- Junior ISA - £4,128
These allowances are an increase compared to the 2016-2017 tax year where the limits were:
- ISA – £15,240
- Junior ISA – £ 4,080
You can have a single ISA or split your money between several different ISAs. This allows you to split you money between different providers and/or keep some in cash and some in stocks and shares or one of the new types of ISA recently introduced.
Types of ISA
There are 3 main types of ISAs you can consider. You are free to choose how to split your money between the various kinds of ISAs – you can place all of your money into a single kind, or divide it between the different kinds to suit you.
Cash ISAs – The most basic kind of ISA, this allows you to pay money in and earn tax-free interest on it. There are a few different types of cash ISA, including fixed term ISAs, flexible ISAs (which allow you to take money out and put it in with no penalties) and Help to Buy ISAs designed to help first time buyers save up for a deposit on a house.
Stocks and Shares ISAs – If you are looking to earn a higher return on your savings and don’t mind an element of risk, a stocks and shares ISA can allow you to invest your savings into company shares in a variety of ways. This still gives you the same tax benefits as a standard ISA, but does come with the same risk as any investment in stocks and shares i.e. that the value of your investment can go down as well as up.
Innovative Finance ISAs – The government now allows peer-to-peer loans to be held within ISAs, allowing lenders to earn tax-free interest on loans arranged through peer-to-peer platforms.
Who are ISAs suitable for?
Every adult should have some savings in cash for security and easy access in the event of an unexpected emergency. Experts suggest that this should equate to approximately three months' salary. A cash ISA is an ideal home for rainy day funds if you are a taxpayer, as many ISA accounts provide an instant access option. As with all savings accounts, it's important that you shop around for the best deal.