Anyone new to the personal finance world might have seen the word ISA being thrown about a lot in various conversations. If you’ve only ever held a basic bank account its understandable to be a bit confused and unsure as to what an ISA actually is.
The simple answer is that its a bank account where your interest isn’t taxed. Most people only make a few pennies in their current account so the tax man taking 20-40% of it isn’t noticed (its even taken out before it gets put into your account).
This is a risk free-straight forward type of bank account that millions of people have in the UK. But before you rush out to get one it needs to be mentioned that they became almost useless for most people in 2016. As part of a plan to encourage saving the government have given all UK citizens the right to earn £1000 interest tax-free. This means the main benefit of the ISA has now been applied to your current account.
If for some reason you do have enough money sitting in your account to earn the £1000 tax free then moving any extra cash to an ISA would be beneficial, but I’m fairly certain the number of people in that category is close to zero.
Its worth mentioning that there are also some special types of ISA which you may hear commonly mentioned and are still useful to look into as they carry extra benefits alongside being tax-free. The first is the stocks and shares ISA which lets people invest the money into buying shares that they pick themselves. The second special type of ISA is called Help to Buy which is designed to help first time house buyers get a deposit. All money you put into it gets a 25% bonus added by the government when you put it towards a deposit on a house.