An Individual Savings Account (ISA) is one of the most effective and efficient ways to not only save your money, but ensure you aren’t paying more tax than you need to.

With a number of incentives in place to encourage ISA investment, savers can enjoy a more streamlined and manageable tax bill each year if they make the most of their allowances.

Every year, you can invest  £20,000 in ISAs to enjoy tax-free interest. It doesn’t have to be the same ISA, either: You can put funds into a cash ISA, one for stocks and shares, or even a lifetime ISA (though this does have a £4,000 annual limit), and so long as it does not eclipse the £20,000 limit, none of the funds will be taxable.

Now that we’ve begun a new tax year, being aware of the ways you can use ISA investment can protect your earnings and unlock more tax-free interest.

Main ISA types

There are a number of primary forms of ISA you can invest in, each with their own perks and benefits, and some with their own specific limits and allowances for investment. They are:

  • Cash ISA: A savings account offering tax-free interest on the money you save
  • Lifetime ISA: Allows you to save up to £4,000 a year, with the government adding a 25% bonus if this figure is met. Often used to buy a home or to save for a rainy day in later life. The Government is planning to replace it with a New First Time Buyer ISA; until it does, you will be able to invest under the existing rules indefinitely. Remember, if you need to access the funds early, there is a 25% penalty.
  • Help to Buy ISA: A government-backed scheme that has now expired for new accounts, but anyone who opened a Help to Buy ISA can make the most of the tax-free savings until November 2030
  • Stocks and Shares ISA: Rather self-explanatory, in that it allows you to invest in stocks and shares without the risk of being taxed on earnings from it

Ways to trim your tax bill using ISAs

It is important to note that the annual limit resets each year, so it’s best to find a way to utilise this tax break whenever possible each year.

Each of the different types of ISA offers different limits: A lifetime ISA, for example, has a £4,000 annual limit and you can only open one of these ISAs,  so you’ll have to open other types of ISA if you’re to reach the £20,000 limit.

If you have children, you can also open an ISA in their name as a Junior ISA, which will enable you to save an additional £9,000 tax-free.

Personal Savings Allowance (PSA)

ISAs aren’t the only vehicle for tax-free savings. Another option for tax-free investment is what’s known as a Personal Savings Allowance, or PSA for short. This is eligible for most UK taxpayers, and offers up to £1,000 of tax-free interest on your income savings if you pay basic rate, and £500 if you pay higher rates of tax. People in the additional rate tax band are not eligible for any PSA.

This allowance applies to interest amassed from bank and building society accounts, savings and credit union accounts, trust funds, peer-to-peer lending, investment trusts and more, but savings in pre-existing tax-free accounts like ISAs do not count towards your Personal Savings Allowance.

Please feel free to contact our team and we would be happy to assist you.