The new year is coming which usually for many brings about that dreaded word - resolutions. Of course, a good resolution for anyone is to start to better sort their personal finances out. Well, one of the easiest ways to begin is by opening a tax-free ISA account. Here's all you need to know.
What Are Individual Savings Accounts (ISAs)
ISAs are accounts designed to be legally shielded from tax. There are two types -
1) Mini-Cash Isas which allow up to £3,000 per tax year to be invested, these pay interest and the money is instant access. In many ways a mini-cash Isa is just like a savings account only the interest earned is 100% tax-free
2) Self-Select ISAs, these are designed to place stocks and shares in up to the value of £4,000 per tax-year. Gains are also tax-free
In this article however we are only going to be looking at mini-cash ISAs.
How To Open An ISA
Simple, all banks and building societies offer cash based ISA accounts and they are as easy to open as a normal savings account. As mentioned before money can be paid in (up to the max. £3,000) and withdrawn whenever you want. Like any savings account the interest paid does vary from financial institution. At the time of writing the Halifax has got one of the best deals paying 5%.
The Emergency Fund & ISAs
An Emergency Fund is an account that should hold 3-6 months of your total monthly outgoings in case you lose your job or something else disastrous. But paying in 3-6 months of salary in one go is not easy for many, the way to approach this obstacle is to drip feed money into an account over a period of time, say 1-2 years.
ISA accounts fit the bill perfectly for an Emergency fund especially as they you've got instant access to your money.
Substantial Money Can Be Built Up Over Time
Note, that the £3,000 that can be invested each tax-year rolls up over time. This means that if you started investing £3,000 a year back in the year 2000 you would now have a total pot of £15,000 (plus interest) and ALL of this receives interest tax-free! This is why it's so important to get one of these plans open and start taking advantage of not just the tax free savings this years but over a multi-year period.
Summary
Mini-Cash Isas are a great way to save money tax-free. Recent studies have shown that if you invest £3,000 per annum for 10 years the tax-free benefit would put an extra £1,700 in your pocket. And as we said in the beginning of the article these kinds of accounts are one of the simplest to set up and one of the smartest as well.
See Also
