What is an ISA?
If you are looking to save money, you may be looking at the options which are available to you – one of which you may have found is a cash ISA.
A traditional savings account is designed to help an individual save money by providing a space to put certain amounts of cash aside so that it cannot be spent. With most savings accounts, however, you can go directly into the account and transfer over any money you wish to spend into your current account. You will gain interest on the money you save, and the amount you will receive will be down to how much and how long your money is in there and will be subject to the individual bank’s policy. Anyone who is a UK resident can open up a savings account, there are even accounts which are available to those who are under the age of 16. However, most savings accounts are held by adults.
What makes an ISA different to a traditional savings account?
The way that a cash ISA works is very similar to a traditional savings account. However, unlike with a savings account, you will not pay any tax on the interest you earn with a Cash ISA.
The cash ISA came into effect in 2016 in the month of April and has since acted as an addition to the new Personal Savings Allowance (PSA).
All basic rate taxpayers can earn £1,000 of savings in interest without having to pay tax on it with a cash ISA. With a standard savings account, this is not the case as you do have to pay a certain amount of tax on the money that you earn through interest. If you are a higher rate tax bracket which means you will be paying the 40% rate on your income over £45,000 and up to £150,000, you will find that you are entitled to a lower PSA of £500 a year.
Another attractive reason for opening up a cash ISA is that there are not set up fees involved, whereas there might be when setting up ordinary savings account with your bank.
Who can open a cash ISA?
In order to open up a cash ISA, you must be over the age of 16 as well as a UK resident. However, there are specific ISAs, known as junior ISAs, which can be opened by people under the age of 16.
With junior ISAs, it is good to be aware that if the money is a gift from a parent then you may actually be liable to pay tax on the interest that you have earned from this gift.
How much can you save in a cash ISA?
The great thing about having a cash ISA is that you can put in a limit of a whopping £20,000 per tax year. With this limit, you have the freedom to choose how you make it up. It could be purely by cash, it could be through stocks and share or it can be a combination of any two or all three of these.
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