If you are looking to save some cash, a great way to do so is with a cash ISA. You may have come across the term ISA before, but are not entirely sure what it is. Some people mistake an ISA for just another savings account that works the same way that traditional savings account would, but there are plenty of things which distinguish the two. They also share some similar qualities, after all, they are both tools to help the account holder save their money.
A Savings Account
First, let’s look at a traditional savings account. A traditional savings account provides a space to put certain amounts of cash aside so that it cannot be spent, which ultimately helps the account holder to save money. With this type of savings account, in most cases, there is no restriction on transferring between the savings account and the current account whenever the account hold pleases. Of course, this is a good feature if you are saving up for a specific product and when you have enough, you can simply transfer that amount over online. However, some people find that ability to transfer money at your convenience is too much of a temptation and end up not saving as much as they wished.
With a savings account, you will be granted to ability to gain interest on the money you save. The amount you will receive will be down to how much money you have in your account as well as how long your money is in there. Of course, the amount of interest will also be subject to the individual bank’s policy.
Who can open a savings account?
Anyone who is a UK resident can open up a savings account. Usually, there is no age restriction. In fact, there are accounts which are designed for those who are under the age of 16. However, it is always going to be the case most savings accounts are held by adults, even if it is on behalf of their child.
What makes an ISA different to a traditional savings account?
To be honest, the way in which a cash ISA operates is very similar to that of a traditional savings account, outlined above. Conversely, however, unlike with a savings account, you will not be required to pay any tax on the interest you earn with a Cash ISA. This is an obvious perk and one of the reasons people may decide to go with a Cash ISA over a savings account affiliated with their bank.
It was in April 2016 that the cash ISA came into effect and has since acted as an addition to the new Personal Savings Allowance (PSA).
The way it works is that all basic rate taxpayers can earn up to £1,000 worth of savings in interest without having to fork out any tax on it with a cash ISA. However, when comparing this to a standard savings account, you will find that you do have to pay a certain amount of tax on the money that you earn in interest. Someone in a higher rate tax bracket, which means you will be paying the 40% rate on your income over £45,000 and up to £150,000 for those who do not know, you will find that you are entitled to a lower PSA of £500 a year.
Another reason which attracts savers to opening up a cash ISA is that there are not set up fees involved. In contrast, there may be a fee when setting up an ordinary savings account with your bank, but this will be subject to your own bank’s policy. Some banks allow you to open a savings account completely for free.
Who can open a cash ISA?
In order to open up a cash ISA, you must be a UK resident and be over the age of 16. Nevertheless, if you are younger than the age of 16, there are specific ISAs, which are referred to as junior ISAs, which can be opened by people under the age of 16 years old.
It is important to be aware that with a Junior ISA if the money is a gift from a parent you may actually be liable to pay tax on the interest that you have earned from this gift. Do not get caught out by this.
How much can you save in a cash ISA?
Per tax year, you are entitled to putting in the large sum of £20,000, an extremely attractive aspect of opening up a cash ISA.
The great thing is that with this limit of £20,000, you have the autonomy to choose how you make up the full amount, should you wish. This could be purely by cash, it could be through stocks and share or it can be a combination of any two or all three of these options.
If you wish to learn more about ISAs or are interested in applying for one, we suggest you take a look here for more information.
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