An ISA, or Individual Savings Account, is a tax-efficient savings or investment account available to UK residents, allowing you to put money into a wide range of investments. Essentially, it exempts you from paying capital gains and dividend taxes on your investments, while you can add money up to the annual allowance set by HMRC. ISA in UK parlance is sometimes referred to as a ‘Tax Wrapper’. Trading 212 offers only a Stocks & Shares ISA. The following ISA types are not supported at Trading 212: Cash ISA, Innovative Finance ISA (IFISA), Lifetime ISA (LISA), and Junior ISA (JISA).
What are the UK taxes on investments?
To understand the value of using an ISA, it is worth taking a brief look at how taxes on savings and investments usually work in the UK without using an ISA. That way, you can see what the ISA is protecting you from.
- Tax on interest - For interest earned on cash savings, if you are a basic rate taxpayer, you receive the first £1,000 in interest earned tax-free and then pay 20% on anything above this. Higher rate taxpayers receive £500 in interest earnings tax-free and then pay 40% tax on anything over that. Finally, additional rate taxpayers get no tax-free allowance at all and pay 45% tax on all interest received.
- Tax on capital gains - This is a tax on profit made from owning an asset when you come to sell it. You are not taxed on investment profits until you sell and realise the gain. You get the first £12,300 of profit tax-free and then pay tax on amounts over this. The rates range from 10% up to 28%, and it depends on what bracket of taxpayer you are (basic or higher etc.) and what the asset is. Forв example, a different rate applies to property versus the stock market.
- Tax on dividends - Many stocks and shares pay out dividends to investors, which is a type of income you receive, and yes, that is taxed too. You get the first £2,000 tax-free and then pay between 7.5% to 38.1% on the rest, depending on what income tax band you are in.
Sadly, there is not a lot that the government doesn't tax! But an ISA is an easy way to avoid all of these (up to a certain maximum contribution), which keeps more in your pocket. Another benefit is that you don’t have to declare them on a tax return or report them in any way.
What are the different types of ISA accounts?
There are five main types of UK ISA accounts, with small variations among them. Trading 212 offers only a Stocks & Shares ISA. The other types listed below are not supported:
- Cash ISAs for saving cash
- Stocks and shares ISAs for investing in the stock market
- Innovative finance ISAs for peer-to-peer lending
- Lifetime ISAs for saving to buy your first home (or for later life)
- Junior ISA
About Stocks and Shares ISA accounts
In a Stocks and Shares ISA, generally, you can include the following types of investments:
- Investment trusts
- Exchange-traded funds
- Government bonds (gilts)
- Corporate bonds
Any investments held in an ISA will not be subject to income tax, tax on dividends or capital gains. So why don’t we just put everything inside an ISA? The answer is that there is a maximum allowance for how much you can deposit per year. You can choose to save across multiple accounts as long as you don’t exceed the annual allowance for the current tax year, set at £20,000 at the time of writing. A Lifetime ISA has a reduced allowance of just £4,000 per year, and a Junior ISA differs too, with an allowance of £9,000 per year. These allowances fit inside the UK tax year, which runs from 6th April to 5th April.
Rules for using your ISA allowance
You can use your annual allowance in full with either a cash or an investment ISA or an innovative finance ISA, paying up to £20,000 in the current tax year. Alternatively, you can split your ISA allowance as you wish across the four different types (subject to individual account limits), as long as you don’t pay more than £20,000 across them all and no more than £4,000 into the Lifetime account. You are limited to using only one of each type in each tax year. A Junior ISA is counted outside of your allowance since that is technically in the name of the dependent you opened it for.
Investing is for the long term, but you can still withdraw money when you need to from the Trading 212 Stocks and Shares ISA. Don’t forget the value of investments will fluctuate, so your account balance may be up or down at the time of withdrawal. When you withdraw from your ISA, your investments need to be sold, and the money is transferred back into your account as cash. With whatever ISA you decide to take out, be sure to check the withdrawal rules before you open the account so you know how these work. With Trading 212, your ISA is ‘non-flexible’. What this means is any replaced withdrawals will count as a subscription for the tax year in which it is subscribed. Imagine you deposited £10,000 and decided to withdraw £1,000 later on. The balance in your ISA might be £9,000, but your current tax year subscriptions will remain £10,000. So if you decide to add more money afterwards in the same tax year, it will be added on top of your original £10,000, not the new £9,000 value.
Transferring to a new ISA provider
You can transfer your ISA from one provider to another at any time, and you can transfer your money to a different type of ISA or to the same type of ISA. If you want to transfer the money you've invested in an ISA during the current year, you must transfer all of it. With the Trading 212 stocks and shares ISA, you can move as much of your ISA contributions from previous tax years as you like. However, if you wish to transfer the money you already put into your ISA this tax year, you'll need to transfer all of this year’s pot together. Generally speaking, transfers take around 30 days, but this does vary depending on what providers are involved. To instruct a transfer, you go to your new desired provider and follow their process to request it for you. At Trading 212, you fill out an ISA Transfer Authority Form, and Trading 212 will contact your previous provider to start the process.
Is an ISA better than a savings account?
ISAs offer tax-free growth, but there are caps on how much can be deposited in a year. They typically also have higher interest rates than savings accounts. Savings accounts offer more flexibility in terms of withdrawals and deposits, but you will be taxed on the interest earned.
What is the benefit of an ISA?
ISAs are a great way to save for your future, whether you're looking to buy a new home, save for retirement, or simply have a rainy day fund. The tax-free growth on your savings means that you can grow your money faster than in a standard savings account, and the flexibility to withdraw money whenever you need means that you're never tied down.
Is it worth having an ISA?
If you have a good income and are able to save regularly, an ISA could be a good option for you. They offer tax-free savings and can be used for a variety of purposes, including retirement planning. If you have high-interest debt, such as credit card debt, it may be a better idea to focus on paying that off before saving into an ISA. Ultimately, whether or not to have one is a personal decision.
What are the pros and cons of an ISA?
The main pro of an ISA is the tax-free growth of your savings. This means that any interest you earn on your savings will not be subject to income tax, which can save you a significant amount of money over time. The main con of an ISA is that you are limited in how much you can contribute to your account each year.