How to make the most of ISAs

Whether you’re considering opening an ISA for the first time or you already have one and want to see if your money is working as hard as possible, here’s what you need to know to make the most of ISAs.

Why save in an ISA?

An Individual Savings Account (ISA) is a savings account where you don’t pay tax on any interest you earn.

Your savings can grow faster than they would in a standard account because interest in an ISA is completely free from Income Tax. Once the interest you earn in a regular savings account exceeds your Personal Savings Allowance, you'll pay tax on anything above that threshold, reducing your effective return.

There's no such limit with an ISA. Every penny of interest stays in your account, where it can earn further interest the following year through a compounding effect – the more you save and the longer you save it for, the quicker your savings will grow.

So, if you’re currently paying tax on your savings in a standard account, an ISA could be a great way to make the most of your money.

Types of ISA

There are many different types of ISAs, and you can choose to pay your full allowance into a single account, or split it between the different types.

Take a look at the below options to help you decide which one’s right for you.

• Easy Access – with an Easy Access Cash ISA you’re free to make deposits up to the annual Cash ISA limit whenever you want, and make withdrawals to suit. Just remember, you can’t take money out of your Cash ISA and replace it in the same tax year, without it counting towards your annual ISA allowance.
• Notice – with a Notice Cash ISA you could earn a higher rate of interest than with an Easy Access account and you’ll still be able to make deposits up to the annual Cash ISA limit whenever you want. To withdraw your money, just give the agreed amount of notice.
• Fixed Rate – If you don’t need access to your money, a Fixed Rate Cash ISA could be ideal for growing your tax-free savings. You’ll get a fixed rate of interest paid tax-free for a set period of time, and you can relax knowing what interest your savings are earning.
• Flexible – With a Flexible ISA you’re able to withdraw and replace your savings as many times as you like as long as you don’t exceed your annual ISA allowance in each tax year. You can even withdraw funds deposited in previous tax years, as long as the money you take out is replaced within the same tax year.

ISA allowances and earning interest

Each year the Government sets out your annual ISA allowance, which is the maximum amount of money you can pay into an ISA in that tax year. You can check this amount on gov.uk and deposit up to that amount in your Cash ISA without having to pay tax on the interest you earn.

Any interest you earn won’t count towards your Personal Savings Allowance (PSA) either.

This PSA means that basic rate taxpayers can earn interest from current accounts, savings accounts, fixed rate bonds or any account where they earn interest. For higher rate taxpayers there is an interest allowance, but those classed as additional rate taxpayers aren’t entitled to a Personal Savings Allowance. You can check the PSA amount each tax year on gov.uk

A Cash ISA won’t stop you from earning interest in other types of saving accounts. And if you’re already earning more interest than your allowance, transferring some of your money into a Cash ISA leaves you free to continue growing your savings without incurring any additional tax.

How many ISAs can I have?

Some providers allow you to spread your annual ISA allowance across several different types, giving a choice of interest rates and access options to suit your needs.

For example, if you had a £20,000 allowance you could open an Easy Access Cash ISA with £5,000 and flexible access to your money, as well as depositing £10,000 into a Fixed Rate Cash ISA, which may earn a higher rate of interest but your savings would be locked away for a fixed term. You could then deposit the remaining £5,000 of your allowance into a Notice Cash ISA.

You should always check the conditions of your account with a provider before making a deposit or withdrawal.

Can I withdraw money from an ISA tax-free?

Yes, for most Cash ISAs any money you withdraw is completely tax-free. You won't pay Income Tax on it no matter how much you take out or how long it's been in the account.

It’s important to be aware of what happens to your allowance after you make a withdrawal. With a standard ISA, you can't pay it back in during the same tax year without it counting as a new deposit against your annual allowance.

A flexible ISA works differently as you can withdraw and replace funds within the same tax year without affecting your allowance. If you’re looking for easy access to your money, it's worth checking whether your ISA is flexible before you open it.

What happens if I take money out of my ISA?

Withdrawing money from your ISA doesn't affect the tax-free status of the remaining funds, they continue to earn interest free from Income Tax, just as before.

Any money that's permanently withdrawn and isn’t replaced loses its tax-free shelter and can’t earn tax-free interest. If it sits in a standard savings account, any interest it earns may count towards your Personal Savings Allowance.

How can an ISA help beat inflation?

Over time, inflation gradually reduces the value of what your money can buy. If your savings are growing more slowly than inflation, their real value is falling even if there’s a healthy cash balance.

An ISA can't guarantee you’ll receive returns above inflation, but it helps to fight tax that’s working against you. In a standard account, tax takes a slice of your return each year once your interest exceeds your Personal Savings Allowance, which reduces how much stays in your account.

In an ISA, more of your interest compounds each year. Over the long term, you’ll keep more of what you earn and give your savings a better chance of holding their real value.

The combination of an ISA and a competitive interest rate could be a simple way to make your money work harder.

How much to pay in to your ISA and when

This all depends on which type of ISA you choose. With most Easy Access and Notice Cash ISAs, you can add to your savings at any time.

So, if you’ve got a lump sum to deposit, you can pay up to the maximum allowance in one go. You could also put money away every now and again, or set up a regular standing order.

With a Fixed Rate ISA, the majority of accounts will only allow you to make deposits during a limited funding window when you first open your account, after which you’re not able to make additional deposits.

For all types of Cash ISAs, the first deposit will usually need to be equal to the minimum balance applicable to each account, after which any future deposits can be varied amounts depending on the amount you have available to save.

Transferring money from another provider

Many ISAs will allow you to transfer money to them from another provider and can arrange the transfer on your behalf.

However, it’s very important that you check the terms of your existing account before arranging a transfer, as there may be notice periods or charges that apply. If you transfer your savings without giving the required notice, or during a fixed rate period, you may be subject to a charge by way of a loss of interest on the amount transferred.

Always check with your existing ISA provider before making a transfer and also let your new provider arrange the transfer to avoid losing any tax benefits for the amount you withdraw.

Who can open an ISA?

You can open a Cash ISA as long as you’re aged 18 and over, and you haven’t subscribed to another ISA in the same tax year – unless you’re using a Mix and Match ISA to spread your allowance over more than one account.

You can only open an account in your own name – it’s an individual savings account! It’s not possible to have a joint ISA and you can’t open one behalf of anybody else.

How ISAs are protected

All eligible deposits in UK savings accounts, including Cash ISAs, are protected up to a total of £120,000 by the Financial Services Compensation Scheme (FSCS), the UK’s deposit protection scheme.

You should always check if your provider shares its FSCS cover with another institution as they could be owned by the same bank. If you spread your savings across more than one provider you could only be protected for a total of £120,000, not £120,000 per provider. You can visit fscs.org.uk for more information on the Financial Services Compensation Scheme.

Whatever you’re saving for, an ISA could help you make your money work as hard as it can. To find out more about our range of ISAs, visit kentreliance.co.uk/ISAs.

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