When it comes to saving, ISAs are the preferred option of many investors. They are a great way of saving cash and shares with a tax-free allowance each year. There are different kinds of ISAs for cash and for stocks and shares, and your allowance is split across any savings of this type you have.
Saving is an option for those with money to spare at the end of each month, or with a lump they are looking to invest. You should always make sure that you have no outstanding debts before you save as saving without paying these off first is not cost efficient. You can check your credit report here www.creditexpert.co.uk/credit-report.aspx to find out what credit you have in your name and if it is affecting your credit rating.
The majority of people who take out an ISA have a cash ISA where they invest what they have to spare from their wages, or money they have come into in addition to regular income. Historically the benefits of these types of savings were twofold, higher interest rates, and tax relief on this interest.
During the recession interest rates have levelled, and there is now little difference between the rates on an ISA and those on a regular savings account. ISAs are still more beneficial however as the tax break still stands. Whilst normal accounts tax on interest of between 20% and 45% depending on your tax bracket, ISAs interest is not taxable. This means that currently there are no standard savings accounts that offer the same returns as ISAs after tax. Choose from instant access, fixed rate or base rate guarantee ISAs depending on your situation. As it stands you can invest up to £5760 in cash in any given tax year.
Stocks and shares can be held in an ISA, meaning that increase in share price is not subject to capital gains tax. There is a limit to how many investments can be held in this way and this is currently set to £11,520 per year. Any dividends are taxed at 10%, which for higher rate taxpayers is significantly lower than the standard rate. You can also reclaim any tax on bonds held within the ISA wrapper. The limit is divisible between cash and share ISAs, so if you use £5760 of your allowance in cash you have the rest of the total £11,520 to invest in shares. You cannot invest more than the £5760 in cash but you can use your whole allowance of £11,520 in shares each year. If in doubt as to whether you have used your allowance and what is remaining you should seek advice from your ISA provider or a financial advisor.
Investments can help your savings go further and minimise the tax you have to pay. Getting the balance right in where you invest, and in what, is key to making the best of your money. It is always best to get all the facts, read the small print, and maybe seek advice from an IFA before deciding how to save.