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There’s lots of different ISAs out there. But the one thing they have in common is the tax benefits they offer compared with a standard savings account. We look at why savers should make the most of ISA season this year.
With winter behind us we’ve entered not one, but two new seasons – spring, and ISA season. People might know lots about spring but less about Individual Savings Accounts (ISAs)! And savers might be wondering why it’s such an important time.
In simple terms, ISA season runs over March and April and it’s when savers are encouraged to use their ISA allowance before the current tax year ends.
Though interest rates seem to be coming down again, they remain higher than they’ve been for most of the time since 2008, so it’s important that savers are making the most of their money and the interest that they can earn in a tax-efficient way.
There are two reasons that ISAs are worth considering this year. First off, ISAs are tax efficient. Higher interest rates have meant people can typically make more interest on their savings.
But, if that cash is held in regular savings accounts then savers will need to pay tax if they earn interest that’s above their personal savings allowance. Practically that means different things for different people. For every £100 of interest earned over the personal savings allowance, a basic rate taxpayer pays £20 in tax, while for a higher rate tax payer it’s £40. That tax bill can soon add up.
Secondly, people’s circumstances change. A saver might be earning a little more each month if they’ve moved jobs or received a pay rise, or they might have that little bit extra to put away if they’ve just become an empty nester.
So it’s always a good idea for savers to review their finances. Anything put away builds a great savings habit and, by using their ISA allowance, they might be able to make their returns a little better thanks to the tax benefits these products offer.
All ISAs have one thing in common:
A tax-free wrapper.
Consumers often can feel overwhelmed when it comes to ISAs. There’s a perception that there’s lots of rules, lots of different products, and not knowing where to start. In some cases this can be off-putting.
But it’s simple when it’s been broken down. The starting point is to remember that ISAs all have one thing in common: a tax-free wrapper.
And when savers are thinking about what’s right for their money, there are two things to keep in mind: the annual allowance, and the types of ISAs available.
Let’s start with the overall allowance. In other words, this is the amount someone can save per tax year – set by the Government – and that’s currently £20,000. So, if a saver were to pay up to £20,000 into an ISA by 5 April, that amount can continue to grow until it’s withdrawn and they won’t have to pay any tax on the interest that’s earned.
When the new tax year starts on 6 April, the contribution limit will reset and a further £20,000 can be added.
The next thing for savers to be aware of is the different types of ISAs available. What’s right will depend on an individual’s savings or investments need, and their risk appetite.
Before we look at the different options available to savers, remember that the £20,000 annual limit can be split across different ISA products – but a saver can’t go over that total limit.
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There are five main types of ISA that savers can open.
Let’s look at the more common types of ISAs and why savers might consider them:
This is a popular ISA, offering lower growth and lower risk, but the balance is secure. There are also lots of options available - if savers are able to lock their money away for year and won’t withdraw funds, higher rates are available.
If savers want to take a little more risk, with the aim of getting a higher return, they could invest in a stocks and shares ISA. These allow savers to hold a range of investments, with any income or gains made free from UK income tax and capital gains tax. Investing in a stocks and shares ISA for at least five years helps smooth out market movements.
It’s worth remembering that investments can go down as well as up. Most providers offer stocks and shares ISAs – including Lloyds Bank. People can choose from three different levels of risk based on what they feel comfortable with.
We get a little more niche when we look at the third ISA option. In simple terms, an innovative finance ISA is where savers can invest in peer-to-peer lending and crowdfunding projects. It’s much riskier that the likes of a cash ISA or stocks and shares ISA but returns are likely to be higher.
These have been around since 2017 and are there to help people save for their first home or retirement. Savers could earn a Government bonus of 25% on the savings but can only use part of their ISA allowance each tax year. The lifetime ISA allowance is currently £4,000 and savers can only withdraw the funds to buy their first home or support retirement when they reach 60 and over – but savers need to beware the exit charge of 25% if they withdraw for any other reason.
The junior ISA is specifically designed for children and a great way to help them get into a savings habit. There’s an annual savings limit of £9,000 – but, they are exempt from the individual £20,000 savings limit, meaning that a saver could max out their annual allowance and still save into the junior account for their child on top of this.
We’ve made it easier for customers to renew their existing ISAs to another in our range, if that now better suits their needs and we’ve streamlined our ISA transfer journey to make it easier and quicker for customers to complete.
Our product range looks to support customers’ different savings ambitions – whether that’s flexible ISAs which allow customers access to their money if they need it, right through to fixed products which can offer higher rates of interest. As well as cash ISAs, through our brands, we also provide stocks and shares, and Junior ISAs.
Customers can apply for these accounts easily through our mobile app and online. And we’ve got a whole host of useful information and tools, including a handy savings calculator.
More details are available on our app and on our website.
This article was originally published in March 2023.
Simon Caddick, Savings Director
Simon is the Savings Director at Lloyds Banking Group, leading the team entrusted to best manage the precious savings of our customers
He is a qualified accountant working in financial services for over 24 years’ and has deep cross balance sheet commercial experience from various senior finance roles in Lloyds Banking Group. Simon is passionate about finding ways in which the group can better serve our customers, increase their financial understanding and empower them to make real changes in the way they think about money management to help save for a better future.
Outside of work, Simon enjoys cycling on the roads of Bedfordshire after many years of playing rugby. He shares two children with his wife, who is a Pilates and Fitness Trainer
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