Money series: all about ISAs

At Source, we know that money can be a confusing topic. Over the next month we’ll be talking about everything from ISAs to apps to make it a little easier.

For the first post in our money series we talk ISAs, or individual savings accounts as they’re lesser known: what they are, what types there are and why you should get one.

What is an ISA?

An ISA is similar to your regular savings account, but a bit cooler. You can only pay in up to a certain amount each year, but any interest you gain will be tax free.

Tax free

I know what you’re thinking: how do you even gain interest and what does tax free mean? You earn interest when you pay money into a savings account, like an ISA. Think of it like a small bonus for saving your money and not touching it.

The interest will likely be a small percentage of what you have saved. If you saved £1,000 and the account had an interest rate of 2%, at the end of the tax year you would have £1,002.

If you have a regular savings account then the interest you earn will be taxed, which means the government will take a percentage of your interest. Remember that only your interest is taxed, not the money in your savings itself, so you’ll probably only be missing out on a few pounds a year.

The difference with an ISA is that it is tax free: you get to keep all of the interest you earn.

Limits

While it would be nice if you could save as much as possible and not get taxed on your interest, ISAs have limits. That means you can only save a certain amount in your ISA each tax year and you can only have one ISA open at once.

This limit is different for each type of ISA but for the most common one, an Instant Access Cash ISA, the limit is £20,000 this tax year. The tax year normally runs from 6 April to 5 April so if you opened an ISA now you could put money in up until 5 April 2019, or until you reach the limit.

Types of ISA

There’s loads of different ISAs to choose from, but there’s three that you would be most likely open now.

Instant Access Cash ISA

If you open an Instant Access Cash ISA, you can withdraw and deposit money up to your limit as often as you want. The only downside is that the interest rate is normally variable on this type of account. That means the percentage of interest you get back could change from the start of the tax year to the end of it.

Fixed Term Cash ISA

If you know you won’t need the money you want to put into your ISA, this is the perfect account for you. To open a Fixed Term Cash ISA you have to deposit a lump sum of money, normally a minimum of £500. Once your money is in the account you can’t touch it for a set amount of years, usually between one and five.

Not being able to access your money might sound daunting, but it means the longer you keep your money in the account, you’ll get a better interest rate. More money for saving your money sounds like a win to us!

Help to Buy ISA

Unfortunately a Help to Buy ISA isn’t a mode of saving for your next shopping spree, it’s all about saving a deposit for your future home. With this type of ISA whatever you pay in, the government will add an extra 25% on top. That means that if you pay in £1,000 they will add £250 on top.

With this ISA, you can only pay in up to £200 a month and the limit is set at £3,000. This is the perfect account for those who are hoping to buy their first home, something which can seem impossible for us millennials.

Opening an ISA

Before you rush to the closest bank to open an ISA there’s a few things you should know. You can only pay into one ISA in each tax year, but that doesn’t mean you can’t open a one each new tax year if you manage to save up to your limit.

Criteria

The criteria for opening any of these ISAs is simple, you have to be at least 16 years old, a resident in the UK and have a national insurance number: if you have a job you can find this on your payslips, if not, your parents will probably know.

Where to go

You can open the three types of ISA with any bank either in your local branch, via your online or mobile banking, or sometimes over the phone. You’ll normally need to provide your name, address, national insurance number and a signature.

ISAs normally have a minimum amount of money you need to pay in to open them, but this can be as low as £1.  Information about the terms and conditions of an ISA, and the interest rate you will receive will be different at each bank. You’ll be provided with this information when you apply and should always read it through before continuing.

Extra information

For more information or advice on ISAs you can read a helpful guide like this one from Which? or this one from Money.co.uk. Alternatively just head into your local bank and ask for some advice, staff will be able to explain different ISAs to you in simple terms and can help you decide which one is best for you.

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