Before I started out as a finance journalist I didn’t know a thing about ISAs. In fact they seemed like a bit of enigma and I assumed they must be far too complicated for me to ever have one. The worrying thing is, I think plenty of other people feel the same.
But you absolutely do need one. And what’s more they don’t have to be complicated at all.
Don’t think of an ISA as an account in itself. Instead think of a normal savings account, then picture the ISA as a ‘wrapper’ around that account which protects your savings from tax. That’s all it is, but it could mean the difference between you losing hundreds of pounds in tax or keeping it all.
The cash ISA allowance is higher than ever at the moment as the government look to encourage us to save. That’s great news as it means you can put more money away from the tax man – £5,340 this tax year, and from 6 April (when the new tax year starts) it’ll increase to £5,640.
So why do you need one?
I always say to people that after their emergency fund – that stash of savings you should have in case you get made redundant or face any other financial difficulty – an ISA is the next most important stash of savings you should have. That’s because it’s just like saving money in any other account, except that you don’t pay a penny of tax on your interest. So when you think of it like that, it would be crazy not to take advantage.
Why should you start saving now?
1. Once it’s gone it’s gone
The ISA allowance doesn’t roll over – once the tax year is over it effectively starts again. So, if you don’t put any money away before 5 April, you’ll have lost your allowance for this year. Even if you can’t make the full amount, any money you do get in an ISA before the cut-off can stay tax-free forever if you want it to. So over time, you can gradually build up more and more savings that are tax free.
2. The best deals will be around in March
As the ISA deadline draws ever-closer all the banks will fight to get your money – which is great news since it means they’ll up their interest rates, and you’ll get a better deal, which in some cases you’ll be able to lock in for the whole year, or even longer if you want.
3. You can get a good savings stash together
You don’t have that much time left but the sooner you start saving, the more you’ll have for your ISA. And the more you have the more interest you’ll earn, tax-free. The more money you can get in there the better remember, because once it’s there it can stay tax free forever. Even if you just start squirrelling away a little every week, it’s better than nothing.