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With interest rates remaining low, it has been pretty difficult recently to find savings accounts that really make the most of the money that we put aside for a rainy day. Almost across the board there has not been much to get excited about in terms of the returns on funneling cash into a savings account. However, while there’s not a lot that can be done about interest rates, it is at least possible to give your savings a boost by putting your cash into accounts where you don’t have to pay tax on them. So how does it work?
What is an ISA?
Individual Savings Accounts (ISAs) have been around for around 17 years now and were initially introduced as a way of tax efficient cash saving with a limit of £3,000 a year. Things have changed quite considerably since ISAs were introduced, both to take account of the different ways in which people save and to offer a much larger level of tax free savings per person.
How do ISAs work?
Anyone over the age of 16 in the UK has a tax free savings allowance in the form of an ISA. This gives you a certain amount of tax free saving per year – every year you can put money up to that amount into your ISA and then on April 6th every year you start again with the new tax year and you can create another ISA full of tax free cash.
How much can you save with an ISA?
From the original limit of £3,000 cash ISAs were gradually increased over the years but it wasn’t until recently that the limits were really boosted. Now you can put up to £15,000 per year into your ISA and this isn’t just limited to cash. The old system used to work to offer two different types of ISAs – a cash ISA and a stocks and shares ISA – and there were individual limits on what you could put into either of these. Now you can choose to allocate the £15,000 allowance as you want so that the tax free element is applied to whatever combination of cash and/or stocks and shares you have in a way that gives you the most tax free savings.
Can you access cash in an ISA?
An ISA is basically just a savings account that you don’t pay tax on – when you look at it like this it’s much easier to understand the ISA basics. So, just like any other savings account there are options for locking your money away and other options that allow you to access your cash as and when you choose. The one for you will depend on how you want to save, and the choice you make might influence the interest rate that you’re able to get.
How much do you save?
With an ISA when you earn £100 in interest then you get to keep the whole amount, unlike a regular savings account. If your money is not in a tax free savings account then you’ll lose a proportion of the interest earned depending on whether you pay basic or higher rate tax. For example, of that £100 earned if you’re a higher rate tax payer you’ll only receive around £60 of it. If you’re a basic rate tax payer it will be £80.