Two things are certain in life – death and taxes. Well, maybe not so much the latter if you use an ISA!
As the 5th April 2021 is fast approaching, which is the end of the tax year, now is the perfect time to think about setting up an ISA for the new tax year.
Let’s talk about ISAs, the main benefits (any growth on your money is tax-free year after year!), and why you should consider a Stocks & Shares ISA.
Maybe you’ve heard it on social media, maybe you’ve heard it at work, but never had the mind to ask: What is an ISA? It stands for ‘Individual Savings Account’ and it’s an account where you can put your money and any growth will be tax-free.
Each tax year, we get a £20,000 ISA allowance. HMRC sets this allowance each year and it could change in the future. It is smart to use up as much of this allowance as possible each year since anything that isn’t used cannot be carried over. It’s a use-it-or-lose-it situation!
There are different types of ISA, but a Stocks & Shares ISA will give you the opportunity to grow your money in real terms.
Let’s put things into perspective.
The difference between a Cash ISA and Stocks & Shares ISA is that with the former you are saving money and with the latter, you are investing.
Any interest earned inside of a Cash ISA is tax-free, just like any investment growth inside of a Stocks & Shares ISA would be tax-free. It’s important to think about how hands-on you want to be before selecting the best platform for you, as well as thinking about what you specifically would like to invest in. Wombat provides a Stocks & Shares ISA and offers a range of funds for you to choose from to get started, or if you prefer, a curated selection of stocks for you to invest in the brands you love. As with all investing, you should remember that the value of your investments is not guaranteed and you could get back less than you originally invested.
The truth is, Cash ISAs won’t help you build wealth over the long term.
From my experience, when you speak to older generations about ISAs they are usually talking about Cash ISAs. Using a Cash ISA was fairly lucrative a couple of decades ago but now by locking your money up for five years, the best interest rate available at the time of writing provides just 1% per annum.
To put this into perspective, if you had £10,000 and locked that up for five years in a Cash ISA you would earn £100 per year.
But this doesn’t tell the entire story: Enter inflation.
Inflation erodes the value of our money over time. The Government’s current target for inflation is 2%, so if you are only getting 1% on your savings, the value of your money (the amount you can buy with it) is actually reducing over time, regardless of the tax benefits.
Building wealth requires your money to grow and to do this we need to invest to give ourselves the opportunity for growth ahead of inflation!
Stocks & Shares ISAs are all about investing your money consistently each month and watching it grow over time. Any money you contribute to your Stocks & Shares ISA will grow completely tax-free.
By using a Stocks & Shares ISA, any growth on your money is tax-free! But what does ‘tax-free’ actually mean?
We all want to pay less to the taxman.
The capital gains you make are tax-free with a Stock & Shares ISA. If you invest £1,000 and over time this grows to £2,000 that increase is completely tax-free. Had you not used a Stocks & Shares ISA you may have been liable to pay some tax. Any dividends you receive inside of a Stocks & Shares ISA are tax-free. And any bond interest you receive inside of a Stocks & Shares ISA is also tax-free.
The goal of investing is to grow and compound your wealth over time. This flexibility could supplement your pension and help you retire before the traditional retirement age to live off your investments.
The alternative is to use a General Investment Account (GIA) – just a fancy way of saying your regular investing account. But a GIA does not benefit from the tax advantages of a Stocks & Shares ISA. You would pay Capital Gains Tax on any growth you take in excess of your annual allowance.
History has shown us that time can work its magic in making our money grow. It’s all about buying and holding for the long term.
I certainly believe that the more boring the investment approach, the better, contrary to what you may have seen on The Wolf of Wall Street.
In the early years, it requires us to do the heavy lifting, contribute monthly and invest as much as possible, but over the long term, time and the effect of compounding will grow our wealth exponentially. This is why I am a fan of investing automatically. Wombat automatic deposits take away the work of remembering to invest each month. It’s easy to set up an automated deposit each month.
This ‘automation’ is the best habit I have built when it comes to investing.
Personally, I am a fan of using funds which are a collection of different stocks as opposed to investing in individual stocks. Wombat offers a range of funds to fit your specific needs and interests, such as the All American and The Techie.
A Stocks & Shares ISA is easy to set up. It takes only a few minutes with Wombat!
It is the best way to invest for the long term as all of your money benefits from tax-free growth (if you took a shot for every time I’ve said that you wouldn’t be in a good state by now!).
Now you have two choices: You can start with Wombat today!
If you currently have a Stocks & Shares ISA and want to switch platforms then you’re in luck because Wombat makes it easy to switch from another provider.
Or if you’re new to it, you can start today and open up a new Stocks & Shares ISA with Wombat before the tax year begins and start investing!
Ready to start your wealth building journey whilst paying no tax by using a Stocks & Shares ISA? Invest inside of a Stocks & Shares ISA and forget about the faff of taxes! Make sure you take advantage of the £20,000 allowance we get each year that resets on 6th April!
Your capital is at risk. The value of your investments can go down as well as up and you may get back less than your original investment.
Ryan from Making Money Simple (@makingmoneysimple) produces content on Instagram and TikTok that shares his knowledge and expertise with young people in the UK to get them started with investing.