Which Isa is right for me? We round up all the options for savers and investors

Anyone wishing to protect their savings or investments from the taxman, it could be wise to consider opening an Individual Savings Account (Isa) if you haven’t already. 

You can think of an Isa as a shield that protects savings or investments from being subject to taxation. 

There are five types of Isa you can take advantage of: cash, stocks and shares, lifetime and a innovative finance Isa – and one specifically for children, the junior Isa.

The tax protector: You can think of an Isa as a shield that protects your savings or investments from being subject to taxation

Every tax year you can put money into one of each kind of Isa. With the end of another tax year approaching on 5 April, time is running out for anyone thinking of setting up, or contributing to one for the current year.

You can save up to £20,000 in one type of account or split the allowance across some or all of the other types.

For those who want to save on invest towards their child’s future there is also the junior Isa. There is a separate £9,000 annual allowance for this which is not included as part of the £20,000 adult allowance.

Most people either opt for a cash Isa or a stocks and shares Isa.

Those saving into a cash Isa will shield any interest they earn from being taxed, while those using a stocks and shares Isa won’t be subject to tax on any dividends or capital gains.

We have put together a quick summary of each type of Isa to help you decide which might be best. 

Cash Isa

Anyone who is a resident in the UK and aged 16 or over can save into a cash Isa.

Without a cash Isa, any interest earned will only be tax free up to a certain level, due to the personal savings allowance.

This allowance means basic rate taxpaying savers won’t need to pay tax on the first £1,000 of interest they earn. Higher rate taxpaying savers are afforded protection up to £500. However, additional rate taxpayers have no such allowance.

Look after the pennies: Those saving into a cash Isa will shield any interest they earn from being taxed

With savings deals paying so little at present, the interest rate will likely be far more important to the majority of savers than the tax free wrapper. Therefore cash Isas may only benefit those with large amounts of savings.

But over time, pots can build and with rates currently on the up, this situation could change quickly.  

It’s also worth noting that cash Isa savings rates are currently lower than the equivalent standard savings rates offered on the market, so it’s worth checking whether holding your savings in an Isa would actually earn you more.

In terms of the best deals, three providers currently pay 0.8 per cent for an easy access cash Isa. The best one year fixed rate cash Isa pays 1.28 per cent whilst the best two year deal pays 1.56 per cent.

Our independent best buy cash Isa savings tables will give you an overview of the best deals on the market.

Stocks and shares Isa

Any UK resident aged 18 or over can invest in a stocks and shares Isa.

Those investing outside an Isa will often receive dividends from their investments. 

Although there is a £2,000 personal allowance once your dividend income exceeds this in a given tax year, you will start paying tax.

From the start of the new tax year basic rate taxpayers will be taxed at 8.75 per cent whilst higher rate taxpayers will be taxed at 33.75 per cent. 

Any stocks and shares sold outside an Isa will also be subject to capital gains tax, although there is a personal allowance of £12,300 a year for this. 

Isa Isa baby: It means you have no tax to pay on any dividends, growth, interest or income you get from your investments.

Capital gains tax can be charged on any profit you make on an asset that has increased in value, when you come to sell. 

For stocks and shares you will be charged 10 per cent if you are a basic rate taxpayer and 20 per cent if you are a higher rate taxpayer. 

It therefore can be very beneficial to use an Isa to avoid this costs, particular as your investments are likely to snowball over time. 

If you’re looking for the most cost-effective way to invest you may wish to consider online DIY investing platforms, as most of these include the option to invest in an Isa.

When weighing up the right one for you, it’s important to look at the service that it offers, along with administration charges and dealing fees, plus any other extra costs.

This is Money has written an extensive guide on the best and cheapest DIY investing platforms, which might help you decide.

Junior Isa

Jisas can be opened for anyone aged under 18 living in the UK, and parents can contribute up to £9,000 each tax year.

Parents can either opt to use the tax free wrapper to either save or invest towards their child’s future.

When saving into a cash Jisa all interest earned will be shielded from tax, while those who invest in a stocks and shares Jisa will be shielding any dividends or capital gains from the taxman.

The £9,000 Jisa allowance is separate from an adult’s personal Isa allowance meaning if you are someone capable of making full use of your own £20,000 Isa allowance each year, you won’t be using up your own tax free allowance when contributing into it.

However, for all its positives, parents need to be aware before saving or investing in a Jisa, that once the child turns 18, it becomes their money to do what they like with. 

For those opting to save into a Jisa, the returns on offer are actually much better than adult cash Isa options.

For example, Bath Building Society pays 2.65 per cent, Dudley Building Society pays 2.5 per cent, the Family Building Society pays 2.4 per cent. whilst Coventry Building Society pays 2.35 per cent.

Jisa alert: While you might hope all your hard-earned savings might go towards something sensible such as a deposit for a property or on tuition fees, you ultimately won’t have the final say on how the money is spent

There are fewer Jisa stocks & shares providers than for adult Isas. However, there is still plenty of choice.

Most DIY investing platforms offer a Jisa service, including Hargreaves Lansdown, AJ Bell, interactive investor and Fidelity.

A number of online investment management services such as Nutmeg, Wealthify and Moneyfarm also offer a Jisa service.

These will invest on your behalf in accordance with your personal risk profile.

Lifetime Isa

This is a great option for those saving towards a deposit for their first home and can be used as part of your annual personal £20,000 Isa allowance.

Savers under the age of 40 can open a Lifetime Isa (Lisa) and until they hit 50, the Government will chip in £1 for every £4 they save, giving a £1,000 bonus on the maximum £4,000 a year you can save.

That money can either be used towards a deposit on a first home or be withdrawn from the age of 60 to help fund retirement.

Boost: Savers under the age of 40 can open a Lifetime Isa and get a 25% government bonus.

However, there are two crucial rules to be aware of.

First, whether buying individually or as a couple the value of the property must not exceed £450,000.

You may also end up worse off if you decide to cash in the Isa before 60 without buying a first home. This is because a 25 per cent penalty applies to the amount withdrawn in this case.

Like with the standard Isa, you can either choose to save or invest your money via a Lisa. However, your options are more limited.

The best cash Lisa deal is currently offered by Nottingham Building Society. Its Beehive Lisa can be opened with £10 and pays 0.8 per cent interest.

As for those taking a slightly longer term approach opting for a stocks & shares Lisa, Not all DIY investing platforms offer this service.

For example, Interactive Investor, Vanguard, Fidelity and Freetrade don’t, but Hargreaves Lansdown, AJ Bell, Nutmeg and Moneybox do.

Innovative Finance Isa

IFISAs let you use your tax free Isa allowance to invest in peer-to-peer lending.

These are typically loans that you give to other people or businesses without using a bank, in return for interest.

However, anyone considering going down this route, should approach with caution and they are relatively niche. 

Earlier this year, the world’s oldest P2P lender, Zopa Bank closed down its P2P business returning all investments to its investors.

Funding Circle, the UK’s biggest P2P lender is not currently accepting new sign-ups and has paused new lending for its existing investors.   

There can also be complications surrounding liquidity were you needing to have the entirety of your investment returned. 

For example, last year, Funding Circle suspended loan sales due to market volatility. Under these circumstances investors can only get their money out when borrowers repay loans.

IFISAs come in all shapes and sizes, lending money for individuals, small businesses, property developments, historical refurbishments, or renewable energy projects.

Some argue that it offers a good middle ground between cash and investing. Higher returns than cash and less volatility than stocks and shares.

However, a key issue is that money invested via an IFISA will not be eligible for FSCS protection up to £85,000 per individual unlike most savings providers and investment platforms.

This means, if the company the P2P platform has lent your Isa cash to defaults on its loans you’re unlikely to get your money back.

Therefore, if you decide to go down this route it’s essential to do your due diligence. 

Do your research – read the ‘About us’ sections on their websites, and look up directors on Google to read any news stories that may have been written about them previously.

LinkedIn also offers a good overview of people’s backgrounds – though remember, anyone can edit their own profile to remove the bad bits and accentuate the good bits.

Check the FCA register online for the firm to ensure they’ve been authorised. You can also look up company directors on this register and then do a quick Google news search.

This post first appeared on Dailymail.co.uk