.png)
To save up, it is not always achieved only through spending cuts, where one is often deprived from purchases, or new investment postpones or even interruptions for businesses. To save up also means good and efficient management of financial resources through tax initiatives offered by the government.
One such initiative though which one can save up in taxes is Individual Savings Accounts (ISA).
INTRO
To put it simple, one can deposit a part of their income into this account and not pay tax for interest coming from this income.
There are five basic ISA types:
Cash ISA
Stocks and Shares ISA
Innovative Finance ISA
Lifetime ISA
Junior ISA
Cash ISA
It is basically like a simple savings account but the difference is that there is no tax for the interest received through this account.
Basic rules:
Deposit limit for 2018/19 ➤ £ 20,000
Minimum required age ➤ 16
Residency ➤ United Kingdom
ISA provisions per tax year ➤ 1
Earnings ➤ Depends on the provider
In addition
Interest income does not have to be included in the individual tax return Self Assessment.
Based on preference, the 20,000 limit be distributed to different ISA products (for example, 10,000 cash + 10,000 Stocks & Shares)
During withdrawal, if it is a flexible account, the re-deposit limit is not lost. The customer loses the limit only if the account is not flexible.
Example:
The deposit limit is 20,000 and during the tax year 2018/19 the customer put 20,000 into the account. Within the same year, however, 5,000 were withdrawn. If the account is "flexible", the customer can re-deposit those 5,000 and the interest deriving from this amount will not be taxed. If this is a "non-flexible" account, the customer cannot put that amount back and therefore there is no way save up in taxes on those 5,000.
ISA can be transferred form one provider (a bank, for example) to another.
If ISA was opened in the UK and the beneficiary later moved abroad, He/She cannot put extra money after the moved date.
In case of death, ISA is closed when a) the heir closes it, b) its management is complete in terms of time or c) in case none of the above is applied, it will be closed automatically after 3 years and 1 day.
Stocks and Shares ISA
In terms of mechanism, it is very similar to “cash ISA”. The main difference between the two, is that here one can also invest in products such as stocks instead of only cash. The most important advantage is that the investor actually participates in the course of its investment. This happens, because having shares means the investor have some rights on the business (for example, the right to vote for or against a strategic decision).
Innovative Finance ISA
Innovative Finance ISA is a new type of investment tool and it is very similar to the traditional Cash ISA. To put in simply, with IFISA one can invest their money through the constantly increasing Peer-to-Peer lending market (such as Zopa) and take advantage of tax relief on those investments returns.
This investment tool was established by the government in April 2016 so that businesses with high risk level can have access to foreign capitals (in other words, they can borrow money) more easily. This is highly important since in general, banks hesitate to lend such businesses resulting in shortage of resources which often leads businesses to close down.
It is also important to note that the ISA Manager should be approved by HMRC to have the right to manage such investment.
Lifetime ISA
With Lifetime ISA, one can invest throughout a large part of their life. The difference here is that the annual limit is £4,000 which is part of the above mentioned £20,000. To open a Lifetime ISA, one must be between 18-40 years old and with few exceptions, they can keep it until they reach the age of 50.The government offers a 25% contribution to this ISA in the form of bonus. Therefore, if one invests £800, they actually have £1000.
The main difference from Cash is that if £1000 are withdrawn, the customer will have to re-deposit £250 (which is 25% on all £1000).This account can be used to buy a house, provided that it will be one’s first house.
Also, the cost should not exceed £450,000 if the house is n London (there are different limits for other areas). It should be noted that the house can be purchased within the first 12 months from the date ISA activation.
Junior ISA
This account is suitable for parents who wish to invest on their child’s future (for example, saving for their studies). The child must be below 18. The deposit limit for each tax year changes. For the tax year 2018/19, it is £4,260. It should be noted that this investment is not limited to cash (Cash ISA) but can also include stocks or shares (Stocks & Share ISA).
Whichever product you believe is suitable for you, you should first speak with ISA providers and ask for information regarding the pros and cons of each account. You should remember that with different providers there are important differences in returns even on the products themselves. Make sure you receive all the necessary legal information on such investment, for instance, your future legal commitments to the provider.
Last but not least, one may wonder what are the benefits for the government from all these tax reliefs and bonuses it offers. The answer is that there are various benefits. For example, regulating the level of cash in the country. Despite the fact that this can act as a small indirect tool towards managing currency devaluation, however it is still a tool. In other words, it is a tool of fiscal policy as well.
Another benefit for the government is the support towards new businesses through Innovative Finance ISA. It may be new but this investment tool has a lot of prospects to attract many investments to the country, many of which may also be pioneer and have strong elements of innovation, creating simultaneously new jobs in the UK.
-
Translated / Edited by, Apostolia Nestoratou.
© 2018 UPECO LTD
_
ATTENTION!
This article intends to give only a general informative picture and should not, in any case, be taken as a rule. It is strongly recommended to seek a full and professional guidance specifically for your circumstances before making any decisions.
Comments