An ISA account is a form of a bank or building society account that allows money to be invested and grown over time tax-free. ISAs allow you to save money without paying any income or capital gains tax on your returns.
This means that if you were to invest £1,000 into the stock market via an ISA and it earned 10%, then your overall return would be £1,100 (the original £1000 plus the £100 made). The final figure would be after all charges had been deducted from your initial amount invested.
Benefits of an ISA account
The value of the investments held within the ISA may increase or decrease over time; this can mean high growth rates and a higher risk in a downturn.
Investments held in ISAs are easily accessible, meaning that they can be bought and sold quickly, with all dividends and interest paid to the investor without tax being deducted. What is an ISA?
An ISA can hold different types of investments. The most popular form of an ISA is with stocks and shares, where your money gets invested into companies whose stock price is determined by demand on the market when you want to sell them again. Other forms of investing include cash, ETFs (exchange-traded funds) and investment trusts which invest in areas such as property or bonds. As long as it’s a legitimate investment, it can go into a regular ISA account.
Getting an ISA account
Anyone can open an ISA as they are available to the general public. There is no minimum age requirement for opening an ISA, and there is no maximum limit either. However, your parent(s) or legal guardian must be permitted if you want them to contribute to and manage your account; this is because they will need a signed statement from you before they can make deposits into it.
Speak with a stockbroker Before making any investments, and you must speak with a stockbroker about what type of return you would like on your money, how long you’re prepared to leave it in the market and how much risk you’re willing to take on when investing. This way, if anything goes wrong, then you’ll very quickly know that you’ve lost some money as a result.
The stockbrokers should also answer any questions you have about the markets, such as what happens on specific dates, especially those around times of high volatility. This can help to reduce your overall risk and uncertainty when investing long-term.
Risks associated with ISA accounts
Be aware of local ISA limits. As previously mentioned, there is no maximum limit for how much you can deposit into an ISA every year; however, places may set limits locally. For example, in the UK, up to £20,000 per tax year (which runs from 6th April one year until 5th April the next) will be accepted within an ISA account without being charged income or capital gains tax.
For example, say you invest £5,000 into stocks and shares ISA with a broker, then at the end of the year, you invest another £15,000. This means that your total investment amount is £20,000 – which means that you don’t need to pay tax on any of your returns for that year (the majority of them) as they fall under the maximum allowance.
Earnings from an ISA do not count towards your income for charges and allowances related to UK Income Tax, National Insurance, Capital Gains Tax, Inheritance Tax and Council Tax.
ISA accounts usually offer free financial management services such as online banking and bill payment facilities. In addition, customers can benefit from preferential overdraft rates. New investors are advised to use reputable online brokers like Saxo Bank and trade on a demo account before investing real money.