How to save for the future in a tax-efficient way

An ISA (Individual Savings Account) is one of the most popular way to save and invest your money – simply because any interest on your ISA savings or growth on your ISA investments is free of income or capital gains tax.

Each year, you’re given an ISA allowance – which allows a portion of your money to grow without having to pay tax on it. Currently, for the 2019/20 tax year, the allowance is £20,000.

It’s important to remember that if you don’t use your allowance within the tax year, it will be lost. Also the earlier in the year you use it, generally the better.

Here's our quick guide containing useful facts about the different types of ISAs available:

Cash ISAs – ideal for short-term financial needs, such as saving for a holiday, a car or emergency funds.

There isn’t a charge involved when setting up a cash ISA, you’re generally able to access your money whenever you wish and there’s no investment risk to your capital. However, your capital isn’t protected from inflation, and the interest generated may not be enough to keep pace with inflation.

Before you choose a cash ISA, it’s a good idea that you shop around to find a competitive interest rate. If you’d like to view our range of cash ISAs, click here.

Stocks and Shares ISAs – suitable for medium to longer-term financial needs

Although there are usually initial and annual charges applied to stocks and shares ISAs, they have the potential to produce higher returns than cash ISAs over the long-term – as the funds you invest in are linked to the performance of Stocks & Shares, or other assets like property.

However, this means your capital is at risk and the value of your investments – and any income you receive – can go down as well as up. You should plan to invest for at least five years.

Junior ISAs – a long-term, tax-efficient savings vehicle for children

A good way to save for your child or grandchild is through a junior ISA, which can shield up to £4,368 (currently for the 2019/20 tax year) from the taxman.  Once a parent or guardian has opened a junior ISA for their child or grandchild, anyone can contribute into it, in either an investment or deposit account. Your child or grandchild is able to access the money once they reach 18 and can spend it however they wish.

Help to buy scheme – a great incentive to start saving for your first home 

Available for first time buyers, if you save money into a help to buy ISA, the government will boost your savings by 25% - so for every £200 you save, you’ll receive £50 on top.

The maximum bonus each individual can receive from the government is £3,000. Therefore, if you’re planning on buying your first home with your partner you could both receive up to £6,000.

Lifetime ISA – a new way to save or invest for your first home or retirement

Introduced in April 2017 for people under 40, a Lifetime ISA enables you to save or invest up to £4,000 a year, and receive an extra 25% bonus from the government until you reach 50. You can either use this money to buy a first home or for retirement.

It’s important to remember that you’d need to wait until you’re 60 to start using the money in retirement; otherwise you’d lose the bonus and have to pay a charge. If you elected to use this money for a purpose other than the above, you’d also lose the bonus.

Other useful facts about ISAs

  • You can move your money freely between cash and stocks and shares ISAs.
  • You can split money between cash and stocks and shares ISAs however you wish, or have your entire allowance in one ISA.
  • Cash ISAs are accessible and you’re able to withdraw your money whenever you wish.
  • You can only subscribe to one cash ISA and one stocks and shares ISA in each tax year.
  • Spouses and civil partners of ISA holders – who have died since 3 December 2014 – are able to inherit their one-off additional ISA allowance. However, other family members won’t benefit.

We can help

Through face-to-face financial advice, we can help you boost the tax efficiency of your savings and investments – and look at how you could use your stocks and shares ISA allowance.

For more information, call us today on 0800 731 5342.

The tax treatment of your investments depends on your individual circumstances and prevailing legislation, both of which may change in the future.