28 April 2025
general
The start of a new tax year can bring with it a flurry of financial considerations. Your Individual Savings Accounts (ISAs) may be chief among these, as they can present a variety of savings and investment options.
While ISAs offer a great deal of choice and flexibility, they each have their own set of rules and unique benefits. It’s easy to feel overwhelmed, but understanding and making full use of your ISAs can help you build a more robust financial future.
Indeed, ISAs are often misunderstood. According to The Investment Association, 1 in 5 UK adults has not heard of a Stocks and Shares ISA, with a further 25% stating that they knew of them, but had no idea how they worked.
At their core, ISAs are designed to provide a tax-efficient way to save and invest, allowing your money to grow without the burden of Income Tax, Dividend Tax, or Capital Gains Tax (CGT).
They can complement a financial plan for this reason, so it may be worth considering ISAs as a core part of your plan. Here, you can find out more about ISAs and how to choose one, or a combination, that’s right for you.
ISAs can be a simple way to grow your wealth and offer advantages over other types of accounts
An ISA is a savings or investment account (depending on the type you have) that offers a significant advantage over other types of savings accounts. One such advantage is tax-free growth. In essence, any interest, dividends, or investment returns earned within an ISA are shielded from tax.
This makes ISAs a powerful tool for building your returns over the long term, as your money has the potential to grow without you having to worry about tax. Do bear in mind that while you won’t pay tax when accruing or withdrawing ISA wealth, when passed down as part of an estate, these funds may incur Inheritance Tax (IHT).
One of the key benefits of an ISA is its relative simplicity. In most cases, you can access your funds without complicated withdrawal processes. This accessibility, combined with the tax-efficient advantages, makes having an ISA an attractive option for a wide range of financial goals.
It’s important to note that each year, you are granted an annual ISA allowance. This is the maximum amount you can contribute across all your ISAs each tax year. This is currently £20,000 and will remain fixed at this amount until 2030.
You can distribute your funds across different ISA types as long as you remain within this allowance, allowing for a diversified approach to your savings and investments.
Using your full annual allowance each year can be a strategic move, as it allows you to maximise the tax-efficient potential of your savings and investments.
There are different types of ISAs to choose from
Cash ISA
A Cash ISA is essentially a tax-free savings account, normally offering interest on your deposited funds without any tax being levied on growth. These accounts are typically considered low-risk, making them a popular choice for those looking to preserve their capital while earning a modest return.
You’ll likely have two options when choosing a Cash ISA.
Stocks and Shares ISA
Stocks and Shares ISAs provide a pathway to investing in a diverse range of assets, including stocks, bonds, and equity funds. Unlike Cash ISAs, you have greater potential for higher returns. However, they also carry a degree of risk, as the value of your investments can fluctuate, and you could lose money.
There are many types of funds you can invest in. Some are actively managed, and some are passively managed.
Lifetime ISA
Lifetime ISAs (LISAs) are designed to help you save for two specific purposes – buying your first home and retirement. The government provides a 25% bonus on your contributions.
The annual contribution limit for a LISA is £4,000, which counts towards your overall annual ISA allowance. They can be useful in certain circumstances, but withdrawing the funds for any other reason other than buying your first home or retirement will incur a 25% penalty fee.
Innovative Finance ISA
Innovative Finance ISAs (IFISAs) allow you to invest in peer-to-peer lending and other alternative investments. These investments can offer potentially higher returns than traditional savings accounts, but they also come with a higher level of risk.
It’s important to do your research and speak with your financial adviser before investing any money in an IFISA.
Junior ISA
Junior ISAs (JISAs) are long-term, tax-free savings accounts designed for children. Parents or guardians can open a JISA on behalf of a child, and anyone can contribute to it.
There is a separate annual allowance for a JISA, which is £9,000 in the 2025/26 tax year, and the funds are locked away until the child turns 18. At that point, they gain full access to the money. This can be a good way of building a nest egg for a child’s future.
All growth within a JISA is tax-free, which means that the child’s savings have the potential to grow significantly over time.
Choosing the right ISAs for you means assessing your individual needs
Finding ISAs that work for your needs means aligning your savings and investment strategy with your individual goals, risk tolerance, and time horizon.
Start by clearly defining your financial goals. For example:
Different ISA types cater to different goals, so choosing an account that works for you is important.
It may also be useful to consider the time frame of your goals. Short-term goals may benefit from more conservative options, such as Cash ISAs, while long-term goals might be best achieved through investing.
Ultimately, ISAs should form part of a comprehensive financial plan, one that considers all aspects of your financial situation.
Remember, a well-structured financial plan will consider your current financial situation, your future goals, and your risk tolerance. This is something a financial adviser can help with.
Get in touch
Navigating your financial plan might feel challenging, but with professional help, you could soundly incorporate ISAs into your overall plan.
Not only can an adviser help you assess your risk tolerance, but they can also help you define your goals and create a tailored ISA strategy that aligns with your long-term needs.
Email enquiries@jesellars.co.uk or call 01934 875 919 to find out more about how we can help you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
