It’s ISA Season!
Things are going pretty great. You’re interesting, funny and probably more intelligent than average. You’ve got a sweet job (or a not so sweet job)… You’ve got a job! All is well.
And now you’re thinking “hey, it might be good to set something aside for the future.” Or get a snack. No! Stick with your first impulse.
Yes, it is a good idea to set something aside for the future. You can have the snack later: time to start saving.
In the UK, one of the best ways to save is with an ISA, which are now a venerable 20 years old.
Since this year’s ISA deadline on 5th April 2019 is drawing near, we thought it’d be a good time for a refresher on our favourite tax-efficient investing accounts.
ISAs are wonderful because:
You don’t pay any UK capital gains or income tax .
You can put in up to £20,000 a year .
No tax admin or hassle.
Most of the time, you can take out the money whenever you want.*
Some ISAs have penalties for early withdrawal.
If you invest with an ISA, you don’t pay any capital gains tax on your returns or UK tax on your dividends.
The US government taxes everyone’s US stock dividends at source, because superpower privileges. So that tax still applies even with an ISA — though UK nationals get taxed on these at a lower rate than Americans.
There are a few types of ISA, with variations within them too, but the two most popular types are:
- Cash ISAs, which pay a rate of tax-free interest (currently maxing out around 2.3% as of March 2019).
- Stocks and shares ISAs, which let you make your own investments in equities, bonds or other asset classes, with tax-efficient returns .
There are also a few rules, including these:
- As of 2018–2019, you can put in £20,000 total across one or more of your ISAs each tax year.
- You can only contribute to one of each type of ISA each tax year.
- Based on the current rules, you can keep as many ISAs as you want open.
So you can have a cash ISA and a stocks and shares ISA and contribute to both in the same year. You can’t contribute to two stocks and shares ISAs in the same year, but you can have as many as you want open and running.
Also note that investing, selling or otherwise moving money around inside a stocks and shares ISA doesn’t count as a contribution. Once it’s been contributed, you can manage the money as much as you want.
Check out the full government guidelines here.
Sounds better than I could possibly imagine… you mentioned a deadline?
Yep, so ISA years are the same as tax years, running from 6th April to 5th April the following year. Your £20,000 contribution limit applies to each year and it doesn’t roll over .
That means that if you haven’t already contributed £20,000 this year, you have until 5th April to add any more money, after which that year’s allowance expires.
Then on 6th April, you get a new allowance of £20,000 to add that year. So if you’d already added the full £20,000 this tax year, you can add up to £20,000 over the course of the next tax year.
So if you want to max out on your annual contribution, you have only a couple weeks left.
And if you’ve already added money to a different stocks and shares ISA this year, from April 6th onwards you can start a totally new one . Like a Freetrade one, to take a random example.
ISAs on Freetrade
Of course, at Freetrade, we offer a stocks and shares ISA, so you can invest in stocks, trusts and ETFs — which can give you access to other assets like gold and bonds too. With the ISA, your returns will be tax efficient. We call our stocks and shares ISA the Freetrade Investment ISA.
You can currently use it to invest in:
- UK and US stocks
- ETFs (exchange-traded funds) which track stocks, bonds, gold and more
- Investment Trusts
You can invest in everything in our universe, except certain investments such as Chinese stocks, like Alibaba, Ctrip and Baidu, or the Israeli company Teva Pharmaceuticals. These trade as ADRs on US exchanges and aren’t ISA eligible.
If you invest for the long-term, the amount of tax you’d have to pay on selling your investments can be very large — even if you start small. So the ISA is very likely to save you a lot of tax money in that scenario.
Once your money has been contributed, you don’t have to invest in anything until you want to, so you can tax wrap money that you might want to invest later . In other words, you can make sure your ISA allowance is used and tax-wrapped, even if you only want to invest with it years later.
And if you do start off your investments outside an ISA, you’ll have to sell them, subscribe the money into an ISA and buy them again to enjoy the tax advantage.
Depending on how much money you’ve made, this could incur tax on the sale. You risk not being able to buy back your investments at the exact same level and it will also be a hassle.
We’ve covered a lot of info before but we have some relevant new details on the Freetrade ISA.
We’re extending our free ISA period for a few extra months of the upcoming tax year (2019–20). We believe ISAs are the best way to invest long-term and want to popularise them as much as possible. The free period will last until at least July 1st 2019.
After that, our ISA will be priced at a flat fee of £3/month, with no percentage fees on the amount you have in the account.
We’ve shipped account switching on iOS, so you can now have a Freetrade Basic account and an ISA at the same time. This also means you’ll be able to invest in those non-ISA eligible stocks, by using your Basic account instead.
Finally, we won’t have ISAs fully available on Android from the launch (beginning of April). It’s our first priority after the initial launch though.
If you’ve already started an ISA on iOS though, you’ll still be able to see and use your ISA account if you switch over to Android.
There’s an old phrase, everything’s avoidable except death and taxes. Well, with an ISA, you can’t cheat death, but it sure does save a lot of tax.
We think the Freetrade ISA is the UK’s best, cheapest way to save and invest for the long-term. If you’re ready to start that journey, head to the app right now!
We’re on a mission to bring fee-free investing to Europe and beyond.
Freetrade does not provide investment advice and individual investors should make their own decisions or seek independent advice. The value of investments can go up as well as down and you may receive back less than your original investment. Tax laws are subject to change and may vary in how they apply depending on the circumstances.
Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).