Covid-19 has made us conscious about our physical health and also our financial health. It is seen that the individuals who are basic tax rate payer are more affected and being furloughed than the higher tax payer as the higher tax payer are the ones with more flexible jobs and they are still continuing with their work (from home).
Today when People are trying to spend their money carefully they are also trying to save their money most efficiently. If they invest money in an ISA they can maximise the returns as they don't have to declare that income, interest or any capital gains on it in their self assessment tax return.
If you are a UK resident l and wants to invest your money to maximise the earnings some allowances are available to you which includes ISA and Personal Savings Allowance
What is ISA? Individual Savings Account which is commonly known as ISA is a tax free savings account. An allowance is given to each individual who is a UK resident and aged 16 or over for Cash ISA and 18 or over for (stocks ISA), up to which an individual can invest money without having to pay interest on the returns of the investment. For tax year 2020/21 which starts from 6 April 2020 and ends on 5 April 2021 the allowance is £20 000, this allowance cannot be carried forward to the next tax year and will be wasted if you do not use it in one particular tax year.
There are different types of ISAs in which you can put money for example there is Cash ISA, Stocks and Shares ISAs, Innovative finance ISA and Life time Finance ISA.
Cash ISA- Cash ISA is the same as the savings account only that tax won't be paid on the interest earned, in these days it would be best to invest in the easy access account where an individual can take out money anytime they want to without affecting the annual allowance. If for example you want to take out some money for paying bills or repairs there is a flexibility of drawing the money and then putting it back in without any penalty rather than the in the fixed rate where although the rate is guaranteed but you cannot they withdraw the money for a period of time.
Stocks and Share ISA – Stocks and Shares ISA will invest money in the stock market. In this time when the markets are volatile everyone is reluctant to invest in the stocks and shares? In fact in this time of crisis many people are trying to withdraw their money from the stock market even if it's a loss just to have some cash. If you already have Stocks ISA you can conveniently transfer Stock ISA to Cash ISA as it wold be easy to withdraw some money when needed.
Innovative Finance Scheme- This includes loans which an individual can give to other people or businesses without using a bank. From an investment point of view, in this tax year, it doesn't seem a good idea to lend money to businesses or individuals.
Another allowance which is available to you is the Personal Savings Allowance
What is Personal Savings Allowance?
Each individual is given an annual allowance for personal saving which means that they can earn up to a certain limit over your investments without having to pay tax on it. This doesn't not affect the ISA . This allowance depends on the income you have. For Basic rate taxpayers it is (£1000), Additional tax payers it is (£500) for additional tax payers it is nil.
Money Savings Expert in their article on PSA explains 'that if you are a basic rate tax payer and over your PSA limit, for every £100 interest you earn in normal savings you only get £80, whereas in an ISA you get all the £100. Therefore the normal savings rate would have to be 25% higher for it to beat a cash ISA. And therefore cash ISAs can be winners even with lower rate'
It would be wise if we can utilise these allowances to maximise the income and minimise the tax given to HMRC.