An ISA is a a tax-free savings or investment account avalible to UK tax payers. You get a new ISA allowance each tax year, the tax year runs from 6th April to 5th April. The current allowance is £20,000.
You can't invest more than £20,000 each tax year, make sure to invest by midnight on 5th April, or else you will lose any remaining allowance.
There are five types of ISA: Cash, Stocks and Share, Lifetime, Help to Buy and Innovative Finance ISAs. P2P loans are only eligible for inclusion in an Innovative Finance ISA.
A Cash ISA is a savings account that pays interest which is free from income tax.
They are typically run by banks and covered by the Financial Services Compensation Scheme (FSCS)
Not many of the easy access cash ISAs are Flexible ISAs so if you withdraw funds you will not be able to pay the money back in, so it will lose its tax free status. The best fixed rate Cash ISAs have a higher interest rate, however the funds aren’t easy access and there may be penalties for withdrawals.
Help to Buy ISAs are a type of cash ISA that were launched specifically for first time buyers but the deadline for opening a Help to Buy ISAs was November 30 2019. You could start by saving up to £1,200 in the first month then £200 per month after that. When you use the money to buy your first home the government will add a 25% bonus up to a maximum of £3,000 to help you buy the property.
A Stocks & Shares ISA is an investment account that lets you put your money in to publicly traded companies, equities, trusts, and bonds. Stocks and Shares are subject to changes in value and so your capital is at risk. Quite a few companies also charge fees to open and hold your ISA and you may be charged to change your investments or withdraw your money. Investments in Stocks and Shares are covered by the Financial Services Compensation Scheme (FSCS) up to £50,000.
Lifetime ISAs are a recent introduction by the government to encourage people to save for later life. You can put in up to £4,000 each year, until you’re 50 however you must have opened the ISA before you turned 40. The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.
Innovative Finance ISAs (IFISAs) are investment accounts that enable you to invest in approved peer-to-peer lending products. Borrowers are typically people or businesses so there is arguably more risk attached than putting your money in a cash ISA. These products are not covered by the FSCS. Popularity of IFISAs has grown rapidly as people are looking for a better return on their money, but it is important to do your research on how the provider manages risk and their experience in their sector as there have been a few recent examples of badly run businesses and poor underwriting practices. Read more on the easyMoney Innovative Finance ISA here.
You can choose how to split your money between the different types of ISA as you can only put £4,000 per year in to a Lifetime ISA the balance of £16,000 could be placed in any of the other options.
Please remember that easyMoney is not authorised to give investment advice and tax treatment is dependent on your individual circumstances and subject to change. Please speak to your accountant or tax adviser before investing. If you are a first time investor, please ensure that you only invest up to 10% of your investable assets in Peer-to-Peer loans.