ISA and tax free savings

The Peachy Guide to ISA’s and Tax-free Savings

Posted on 26th March 2019

You’re looking to save some money; this could be to pay for a holiday each year or something long-term like a deposit for a home or retirement.

There’s no single approach to saving up your desired amount, as it will depend on your timeframe, your current financial circumstances… and even your age.

But, one thing to consider is your tax-free savings – more commonly known as an ISA.

With the end of another tax year just around the corner, it’s a great moment to look at what you could be entitled to to help you save a lump sum.

If you’re not familiar with ISA, don’t worry – we’ll carefully explain what it is, how it works and the best options available to you.

What is an ISA?

ISA is a tax-free saving account, which stands for Individual Savings Account (ISA). An ISA lets you earn interest without paying any income tax; however, you are limited to how much you can put in. The amount you can deposit is £20,000 each tax year (6th April to 5th April the following year).


Before you begin to search for that holiday in paradise, you should consider the following two points before starting to save:

  1. do you have any outstanding debts (outside of a mortgage)
  2. do you have any savings in case of an emergency?

The best advice remains to repay any store cards, credit cards and payday loans first before saving.

Debt interest rates are nearly always higher and will likely eat into any returns you make by saving, certainly in the short term. Plus, debt can cause a lot of stress on you and those around you. So, repay these first.

It is also critical to build up an emergency fund before you start saving towards a particular goal. Unexpected expenses crop up all the time, like your car failing its MOT or the boiler packing in during winter.

The Money Advice Service, a governmental free service, recommends having three months’ essential outgoings on hand in a instant access savings account for such unexpected circumstances.

What are my ISA options?

With so many ISA options, it can be puzzling for savers to decide which ISA to take.

That’s why we’re sharing three ISA options that could match your budget and lifestyle – whether you are looking to save for yourself, a home, or for the younger members of our family.

These 3 ISAs include Cash ISA, Lifetime ISA and a Junior ISA.

Let’s look at each one in more detail.

1. Cash ISA

If you don’t want any risk to your savings, then a Cash ISA is the choice for you.

Like all easy-access savings accounts, you can withdraw your money whenever it is required. Alternatively, savers can open a fixed-rate Cash ISA that limits access to their savings but will pay a higher interest rate.

Fixed-rate ISAs can offer higher interest rates yet customers will be unable to access their money unless they are willing to incur a penalty for withdrawing their funds. If you are thinking that you’d like to save from 1 to 5 years then a fixed-rate ISA is better.

So in reality, only consider this if you really are not going to touch your savings. If you need access, best to stick to an easy-access ISA with a lower interest rate.

A full list of the top paying cash ISAs can be found here.

2. Lifetime ISA (LISA)

For new homebuyers, and those under the age of 40. Then there is a government scheme that offers lump-sum savers saving to put a deposit on a house. A Lifetime ISA pays a bonus of £50 on every £200 saved in the LISA. The maximum that can be saved is £4,000, so effectively a total of £5,000 (£4,000 savings and £1,000 in interest).

LISAs form part of a savers overall ISA allowance, which is £20,000 each tax year, meaning that if you saved £4,000 into a Lifetime ISA, you could only save an additional £16,000 into a regular ISA (either cash, innovative or equity).

For example:

  • £4,000 in a LISA
  • £16,000 in a cash ISA

Total saved per tax year is £20,000 if you are able to put those funds aside.

This is a great opportunity for first-time buyers to save tax-free, get more from the government and finally get on that elusive property ladder.

3. Junior ISA (JISA)

OK, so this is not for your personal savings per se. However, if you wish to save for your child’s future, then they can have Junior ISA.

Junior ISAs can save a maximum of £4,368 for the coming tax year (2019/2020). You can decide to save in both cash or equity for your child, or even have a combination of the two.

Consider this example:

  • £50 a month is £300 a year
  • over 18 years would be £5,400 when your child reaches 18

With the interest accrued over that time, this will leave a tidy sum for your child to begin their life on their own.

A vital point about JISAs is that neither you or your child can withdraw funds from the JISA until your child reaches 18 years old. In theory, you can pay in deposits for your child, even setting up direct debits or moving the JISA to another provider but that is it. When the child reaches 18 – the money is theirs, and you are removed from the account.

Still a great way to give your children a head start at adulthood – if you trust them to manage their own finances!

But, if a junior ISA isn’t for you, the good news is that there are other ways to ensure you can financially support your child.

Final thoughts

There you have it – three ISA options explained to help you enjoy tax-free savings.

So, if you’re thinking of investing in an ISA with the aim of reaching a nice cash reserve, then there is no better time than now!

Some savers will find a cash ISA is the right option as they need frequent access because of life’s little emergencies; for others, it will be more long-term.

Make sure you’ve checked which option suits you best before you begin, and with making any financial plans, always talk to a financial adviser first.

Which of the three ISA”s above will you be using?

Let me know in the comment section below.

Author: Katre Kaarenperk-vanatoa

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