ISA the UK's tax free saving account

What if I told you that you could open an account and never pay a cent on the interest and capital gained?

Sounds amazing, doesn’t it? Almost like it’s too good to be true. 

Well, that’s partially true… You are limited to £20’000 per financial year. This target might seem unreachable right now, but if you are in the right place to change that. 

2 years ago, I had just arrived in London – my eyes full of stars. No idea what to do with my money though… A new country meant a new system. Thankfully, many of my colleagues had come from abroad and could help. They told me about Individual Saving Accounts (ISA). 

Honestly, I couldn’t believe it existed and I come from Switzerland… the country of Banks. This sounded like a golden opportunity. 

As a result, I can’t have you missing out can I? Here, is what you need to know about the ISA system. You can deposit up to £20,000 per financial year  all earnings will be tax free. They come in 4 forms:

  1. Cash ISA
  2. Lifetime ISA
  3. Stocks & Shares ISA
  4. Inovative Finance ISA

Why should you care?

You might be thinking why does it even matter? I’m barely able to save £100 whether my interest is taxed or not won’t make a difference. You couldn’t be further from the truth.

If you were to save £100 a month for 20 years and keep it in cash you would have £24,000. Whereas if you were to invest it in a fund tracking the S&P 500 which annually returns 7% on average – you would have £52,638.21. If you save this money in an ISA you will have earned £28,638.21 tax-free. On the other hand, if you kept the investment in a general account you would be taxed on account of capital gains.  

S&P 500 ETF tracking fund
  • Save

Although the tax-saving might seem minor today, in the long run, your ISA will work for you. Aiming to max-out your ISA should be a goal every year. 

As of now, I have gone from saving around £1000 annually to targeting a £6000 saving goal this year. If I were to pay taxes on my return this year I would go from a £150 interest accrued to around £100. ISAs are a blessing in disguise.

What are the different ISA?

At this point, you might be wondering what are my options? Also, How do they work? In this article, I will summarize each ISA. In effect, giving you an overview of what each account does.

  1. Cash ISA

This one is straight forward it’s a fixed interest saving account. Which is either instant access with a lower interest rate or fixed-term and will incur a penalty for early withdrawal.

  1. Innovative Finance ISA (IFISA)

As an IFISA holder, your investment is in the form of a peer to peer (P2P) loan. Based on how long you are willing to leave your money in the account you will receive interest from the loanee. It’s risky as default is a common occurrence. Withdrawal of funds is also extremely challenging.

  1. Lifetime ISA 

This Account is capped at £4000 p/a and can only be opened between 18 and 40. You can contribute until you are 50. During this time, the government will add a 25% bonus. This contribution can only be accessed when withdrawing for retirement or first-time property buyers.

  1. Stocks & Shares ISA (My favorite)

This Individual Savings Account allows you to invest in stocks, funds, ETFs, and bonds of your choosing via a brokerage platform. Although capital is at risk, it allows you to earn interest, dividends, and coupons tax-free.

I will be doing individual reviews for each type of ISA and giving you tips on how to set them up. If any questions come to mind ask away in the comments.

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Which one did I go for?

So far I have held both a Cash and Stocks & Shares ISA. After seeing the interest rates plummet in March. I decided to close my Cash ISA. Since then, I have invested with both Vanguard and Moneybox. I will review both services in an upcoming blog post. 

Currently, I’m satisfied with my return as on average Vanguard has returned 14% and Moneybox hovers around 6%. As I look to get on the property ladder. The Lifetime ISA will most likely be the next stop in my ISA adventure.

I would love to hear your thoughts on ISAs, if you are not from the UK what does your country offer?

I’ll be writing individual articles for each type of ISA going in-depth on the pros and cons. Watch this space as I will backlink towards each post and include the articles in my Newsletter!

Feel free to share the article with your friends and if you know of anyone with the same question as you.