ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

ISA's - still worth it?

Updated on April 3, 2021
profile image

Tax free savings the easy way. Runs like an ordinary savings account

What is an ISA?

This is really one for UK tax payers as as far as I am aware these accounts are only available in the UK.

ISAs or Individual Savings Accounts were launched by the government in the late 1990's they are a way of saving free of tax – provided you stuck to some terms and conditions such as how much you were allowed to invest each year.

They were divided into cash ISAs and investment (Stock & Shares) ISAs. You can only have one cash and one investment ISA which you add to each year.

Now as stocks and shares ISAs carry a degree of risk to your money so before you take one put you should speak to a financial adviser I will be sticking to the easier cash ISA here.

Did you say Tax Free?

Yes they are tax free and for many years they had comparable interest rates to all other savings accounts sometimes even better – one I had had an interest rate of 6.1% so as this was not taxed you would have had a better return with an ISA than other accounts.

Tax on credit interest for all other savings accounts was deducted by the bank/building society at 20% before the net interest was added to the account. If you were a higher rate tax payer you had to declare it to HMRC

So why are you saying they may not worth it?

Well in April 2016 no matter what savings accounts you had you were, depending on your income, allowed to earn a certain amount of interest on your savings tax free.

There are:

Basic rate tax payer (20% cash) £1000 tax free interest

Higher rate tax payer (40% tax) £500 tax free interest

Additional rate tax payer (45% tax) £0 tax free interest

This allowance was in addition to any ISAs you have which are not included in any of the calculations.

So this means the majority of savers no longer paid any tax on the interest they received on any of their savings accounts. This has left the ISA somewhat redundant.

To make matters worse thanks to the cuts in the base rate ISAs now have really poor interest rates and the tax free status is no longer an advantage for most – unless you have a large sum of money in savings accounts and exceed the allowance. However, if you are willing to or able to lock up your money for a number of years there are some better rates for fixed term accounts but this gives up your penalty free instant access to your money.

That being said, the ISA interest is an additional tax free amount on top of the allowance so if you have one with a good interest rate then max this out first then use other savings accounts to make the most of your allowance.

Finding the best ISA means a lot of shopping around and looking at their terms of the accounts. Ones run online only tend to have a higher interest rate as they are cheaper for the bank to run. However, these accounts often require you to have a certain type of current account at the same bank as well so this may not be worth it in the long run.

However, the tax free allowance can be removed very quickly and easily by the government ISAs less easily so if you already have an ISA it is well worth keeping them – even if it is with the minimal balance in them just in case the tax free interest allowance is abolished.

So what is a LISA?

This is the most recent type of ISA to be launched and was aimed at helping people buy their first home.

You CAN hold one of these and a regular ISA as well and like other ISAs there are both cash and investment LISAs. Again I am restricting this to cash LISAs for investment ones – speak to a financial adviser as I can not advise on them

For a cash LISA the deal is simple, open the account and for every £100 you put in the government will give you another £25 in addition to any interest the bank pays you.

Sounds good doesn’t it – but there are some major restrictions

  • You can only open one if you are between 18 to 39 – on your 40th birthday you are too old to open one.
  • You can only invest £4000 a year
  • You can only pay into the account up to your 50th birthday
  • You can only use the money in the account as part of a deposit to buy a property as a first time buyer (this is a VERY strict definition so make sure you qualify) or to use to build up a pot for retirement and then it is released to you when you are 60.

If you want to take the money out for any other reason – you have to pay a 25% charge of the total amount in the account so not only do you have to pay back all the money the government gave you but also a proportion of what you paid in.

These are best used to build a deposit for first time buyers as the extra 25% from the government is not to be sneezed at.


It’s the first time I’m buying a house to move from the one I inherited so I qualify as a first time buyer don’t I?


No, no and no again. In the UK the term ‘first time buyer’ means you have never owned or part owned a residential property whether you actually bought it or not is irrelevant. If you have inherited a residential property or have been added to the deeds of any other residential property you are NOT classed as a first time buyer and so cannot use this account for that purpose – and yes the government will know as all property ownership is held by the land registry.

As I mentioned earlier ‘first time buyer’ has a very strict definition even above and beyond what I have mentioned so please make sure you are classed as one.

So what about a 'Help to Buy' ISA?

These were all closed to new investors last year but current investors can still use the account until 2029. Hence I cannot really discuss them.

They were designed to help first time buyers to save for a deposit on their first home. They had fewer restrictions than LISAs do.

A warning for US citizens

Since I first wrote this I have found out that the USA is one of only two countries which taxes the income of it's citizens no matter where in the world they live. This means if you are a US citizen you will have to pay the IRS tax on any interest you earn in an ISA even if you live full time in the UK. Your bank in the UK are compelled to inform the IRS if you hold an ISA or they will suffer a 30% witholding tax on all transactions through the US which the bank does. You can't blame Trump for this as it was introduced when Obama was in office.

Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://maven.io/company/pages/privacy

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)
    ClickscoThis is a data management platform studying reader behavior (Privacy Policy)