Tax Free ISA'sIndividual savings account
Well firstly, what is that funny word? ISA, Individual Savings Account, is a tax-man free savings account. All income is taxed and that also includes interest on savings, however, as ISA’s are tax free you can keep all your pennies safe from the tax-man (up to £15,240).
What you need to know
1. About ISA’s
The main use of an Individual Savings Account is to keep your savings completely tax-free, maximising your passive savings income. ISA’s have a limit currently of £15,240, which is updated every year.
You can open more than one ISA, however the catch, you can only open or pay into one account per year. Do note, your ISA allowance will always be the same even with multiple accounts. The 2 most important things to remember with ISA’s are:
- The deposits are what define your allowance and not how much you actually have in the account. If you deposit £500 into your account, then withdraw £100, you have still used £500 of your tax-free allowance for that year.
- Before the 5th of April you need to put away savings as per the condition of your ISA or risk losing the tax-free wrapper.
2. Types of ISA’s
There are 2 different types of ISA’s you should know about, easy access and fixed rate.
- Easy access: you can withdraw funds quickly and easily, do check the terms of repaying the funds to keep your tax-free wrapper.
- Fixed-rate: higher interest rates for your savings but usually house a early withdrawal fee. These accounts are for those who can afford to keep their lump sums of savings in the long term.
3. Remember to check
- What is the interest rate currently (does it change)?
- Does the bank use FSCS (Financial Services Compensation Scheme) to protect your money in case a zombie apocalypse occurs or the bank goes under (maybe not so much the zombie part). This will make sure that if the bank does go under, you can claim back your savings no questions asked.
4. Best Student ISA’s – COMING SOON
Individual Savings Accounts are great, just straight down to the tax free wrapper. There’s no disputing that it’s a great way to make passive income that is not taxed at all.
However even with it being such a good route to push for more passive income, were going to put this in the ‘Thoughts for the Future’ category. Most students don’t reach the £11,000 personal allowance threshold that defines if you are going to be taxed or not and due to this ISA’s aren’t currently your best option.
The best option as a student that is not meeting the £11,000 personal allowance limit is to look at high interest savings accounts. The interest rates on a normal savings account can sometimes easily double that of ISA’s if not even exceed double, which means your super powers as student could benefit your current savings.
Check your annual income before deciding what the best course of action is for you.
Have you ever thought about getting an ISA or thinking about it now? Let us know your thoughts in the comments below.