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Our helpful guide explains how to choose an ISA, the different types of ISAs, and how to make the most of your ISA allowance ahead of the tax year end.

Millions of adults in the UK use Individual Savings Accounts – and for good reason. ISAs are a tax-efficient way to save or invest your money, as any interest gained or returns made on contributions under the annual allowance are free from Dividend Tax, Income Tax, and Capital Gains Tax.

With so much choice available, and a lot of jargon to wade through, it can be hard to know where to start. We’re here to help.

With the tax year end approaching, we understand if you’d rather speak to someone. Our friendly team is on hand to help you understand ISAs, guide you towards the best one for you, and explain how to get started. Just book a free call today.

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Should I save or invest?

When choosing an ISA, the first decision to make is which kind. The two most popular are cash and stocks and shares. Let’s compare them.

A cash ISA is a savings account that pays interest which is free from Income Tax. Different kinds of cash ISAs are available, including easy access (which allow you to make withdrawals), and fixed rate (which pay you a slightly higher rate of interest if you lock your money in for a set period).

A stocks and shares ISA is an investment account that takes your money and puts it to work in the market. Any returns you make are free from Income Tax and Capital Gains Tax. There are many ways you can invest within the ‘wrapper’ of a stocks and shares ISA: you can handpick the individual companies you invest in, choose a fund or a combination of funds, or pay someone to do it all for you.

The main differences between cash ISAs and stocks and shares ISAs are accessibility, return, and risk.

Cash ISAs are usually easier to access than investments – you can generally get your money in a few days. Cash ISAs pay a steady or fixed rate of interest, and the value of your savings will stay the same (unless you make contributions or withdrawals, you won’t see the number in your account move up and down, but inflation could erode the purchasing power of your money over time). As a result of these factors, cash savings are generally considered low risk.

Stocks and shares ISAs are investments designed to be held for the long-term. We recommend investing for at least three to five years. If you want to access your money, it can take more time as you need to sell down your holdings and convert them to cash.

The return you receive depends on what you’re invested in, and the performance of the broader market, which goes up and down over time. Investing carries risk, because you can lose money, but it also offers the potential for reward over the long-term. You can decide how much risk you want to take by choosing what you invest in.

What are the different types of ISA? 

If you decide to invest, there are several different ISA options available to you.

  • Stocks and shares ISAs allow you to invest your money without having to pay tax on the returns, up to the annual allowance of £20,000.
  • Lifetime ISAs allow you to invest towards your first home or your retirement and get a 25% government bonus, up to the annual allowance of £4,000. It’s important to know you’re happy to put your money towards a first-home up to the value of £450,000 or your retirement, as withdrawals for any other reason will usually incur a 25% government penalty.
  • Junior ISAs allow you to invest up to £9,000 a year on behalf of your child. A parent or legal guardian must open a JISA, but friends and family can contribute to them too. The money in a JISA belongs to the child, and except for limited circumstances, cannot be withdrawn until the child turns 18.
  • Innovative Finance ISAs invest in peer-to-peer loans. They are considered higher risk (because the likelihood of not getting your money back is elevated) but offer the possibility of higher returns.

At Nutmeg, we offer stocks and shares ISAs, Lifetime ISAs, and Junior ISAs. Our expert investment team does the hard work for you – building portfolios, researching and selecting the best funds to invest in, and rebalancing when necessary. All you have to do is pick one of our four investment styles, and the risk level that’s right for you.

Our app gives you 24/7 access to your investments, shows you where and in which companies you’re invested, and allows you to make changes to your investment style or risk level if you need to.

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How much can I invest in an ISA?

In the current tax year – which ends on 5 of April 2023 – you can invest up to £20,000 in ISAs and enjoy tax-free returns on your contributions. This is your annual allowance. You don’t have to use all of it and can split it between different ISAs if you want to (though you can only open and contribute to one of each type of ISA each tax year). If you have one, you can contribute up £9,000 a year into a JISA, as the allowance for this product is separate. When the new tax year starts on the 6 of April, your annual allowances will reset.

If you’re thinking about opening an ISA ahead of the tax year end, but don’t want to invest a lump sum in the markets right away, consider using our drip feed feature. It allows you to secure this year’s allowance, and then invest your money gradually in the markets over the coming months. If you don’t have a lump sum, but know you want to make regular monthly contributions, you can automate these by setting up a Direct Debit.

Which ISA is right for me?

Now that we’ve covered the basics, you’re hopefully feeling more informed about the different types of ISAs available and have a sense of which may be for you. It’s a personal decision, and comes down to your reasons for saving or investing.

As a rule of thumb, cash ISAs are great for the shorter-term, while the different varieties of stocks and shares ISAs may be better suited for longer-term goals. If you’d like to chat to someone about opening an ISA, or how to use them to complement your existing savings, book a free call with us today. 

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A stocks and shares ISA may not be right for everyone and tax rules may change in the future. If you are unsure if an ISA is the right choice for you, please seek financial advice.

A stocks and shares Lifetime ISA may not be right for everyone and tax rules may change in the future. You must be 18–39 years old to open one. If you need to withdraw the money before you’re 60, and it’s not for the purchase of a first home up to £450,000, or a terminal illness, you’ll pay a 25% government penalty. So you may get back less than you put in.

Compared to a pension, the Lifetime ISA is treated differently for tax purposes. You may be better off contributing to a pension. If you choose to opt out of your workplace pension to pay into a Lifetime ISA, you may lose the benefits of the employer-matched contributions. If you are unsure if a Lifetime ISA is the right choice for you, please seek financial advice.

To open a Nutmeg JISA, your child must be under the age of 16 and funds cannot be withdrawn until your child turns 18. Tax treatment depends on your individual circumstances and may be subject to change in the future. If you are unsure if a Junior ISA is the right choice for you and your child, please seek financial advice.