ISA stands for Individual Savings Account. The main benefit of an ISA is you can save, or invest money, without paying tax on any earned interest, or capital gains.
How much can you put in an ISA?
In the 2020/21 tax year, you can save up to £20,000 in an ISA. This limit is set by the Government and can change from one financial year to another.
You don't have to declare interest earned or capital gains on savings, or investments, up to that amount on your tax return, so it's tax free. But keep in mind, these rules may be subject to change in the future.
Types of ISAs
Cash ISAs work like other savings accounts, with the added bonus of being tax efficient. You can choose from:
- fixed rate cash ISAs – which offer you a fixed interest rate over a set period of time (not offered by HSBC)
- variable rate cash ISAs – which have a variable interest rate over a set period of time
Interest rates will vary depending on the bank, or building society, you choose.
Stocks and shares ISAs
These enable you to make investments without having to pay income tax, or capital gains tax, on any profits made.
Stocks and shares ISAs give you the potential to earn a greater rate of interest than other savings. But it’s important to remember the value of investments can fall as well as rise and you may not get back what you invested. They should also be considered a medium- to long-term commitment, so you should be prepared to hold them for at least 5 years.
These are designed to help you save for your first home, or for later life. You can hold both cash and investments within them. They're available for people aged under 40 and you can save up to £4,000 a year, up until the age of 50.
The Government will top up your savings, adding 25% up to a maximum of £1,000 each year. You'll pay a 25% charge to withdraw from this type of ISA unless you use it to buy your first home, or you're aged 60 or over.
HSBC doesn't currently offer lifetime ISAs.
Innovative finance ISA
This is an ISA that contains peer-to-peer loans instead of cash, or stocks and shares.
HSBC doesn't currently offer innovative finances ISAs.
How many ISAs can you have?
You can have multiple ISAs in the same tax year, but not more than one of the same type. For example, you could put £10,000 in a cash ISA and £10,000 in a stocks and shares ISA, but you couldn’t spread that money across two different cash ISAs.
The value of an ISA can be passed on to your spouse, or civil partner, tax-efficiently if you pass away. This isn't the case with an ordinary savings account. For this to take place, the Government requires you:
- to be living together at the time of death
- to not be separated by court order, or deed of separation
- to not be in a circumstance where the marriage, or civil partnership, has broken down1
You can save into one type of ISA, or in some cases spread your ISA allowance across several types. Regardless of what type of savings account you choose, the more you save the moe secure you'll be. See some tips on how to boost your savings balance.