As a business owner, you understand how important it is to look after your personal savings wisely. This is why you probably have an ISA, an Individual Savings Account, which allows you to earn tax-free interest on your savings.
What you might not know, however, is that there are several different types of ISA out there. While all wield the fundamental appeal of allowing you to store money which is tax-free on dividends, interest and capital gains, each individual ISA has a particular set of characteristics which bring with them their own advantages and disadvantages. Which ISA is best for you, or rather which combination of ISAs is best for you, will depend on your individual circumstances.
Nonetheless, in this article, we’ll break things down a tad, taking you back to basics as we outline the four primary types of ISA and introduce you to rebuildingsociety.com’s Director’s Loan Account Innovative Finance ISA. The ISA which makes your savings work as hard as you do!
So, are you ready to delve into the world of savings? Well then, let’s begin!
The Big Four
Whilst many of you will be familiar with a typical Cash ISA, there are three other types of ISA which may appeal to you.*
- Cash ISA
- Stocks and Shares ISA
- Lifetime ISA
- Innovative Finance ISA
*The fifth type of ISA is a Junior ISA for those below the age of 18. For more information on such an ISA, visit GOV.UK.
Whilst you must be 16 or over to open a Cash ISA, this age increases to 18 for the remaining three savings accounts. With a Lifetime ISA, there is also an age cap of 40 years.
For the current 2022/2023 tax year, the maximum you can invest in an ISA is £20,000. Although you can choose to split this allowance however you wish across the four ISA types, as previously highlighted, some particularities do arise. For example, the Lifetime ISA has limit of £4,000 per year.
Curious to what the other differences are? Let’s take a further look at some of the other specificities.
Cash ISA
Cash ISAs are the most common type of ISAs and, as the name suggests, it is cash that is stored inside them. This cash can include savings in bank and building society accounts and it can also include National Savings and Investments products.
In a similar vein to normal savings accounts, there are a plethora of different Cash ISAs. From easy-access Cash ISAs to fixed-rate Cash ISAs, they can be as flexible or restrictive as you like when it comes to withdrawing money. Regardless of your withdrawal policy, however, there is never tax to pay on interest.
Stocks and Shares ISA
With a Stocks and Shares ISA, you can use your ISA allowance to invest in funds, bonds and shares in an individual company. There is of course always risk when investing but there are several benefits that are worth highlighting.
Firstly, this ISA type is exempt from Capital Gains Tax. The annual Capital Gains tax-free allowance is £12,300, so this exemption is beneficial if someone’s capital gains are at or above the threshold.
Furthermore, you are not merely exempt from tax on bond interest, but you are also exempt from tax on dividend income.
A Stocks and Shares ISA is a long-term game and is something to consider if you plan on adding to your investment over long periods. After all, the protection from an ISA wrapper is permanent.
For more information on the stocks and shares ISA as well as the other types listed in this article, please head to GOV.UK for a comprehensive list of guidelines.
Lifetime ISA
This ISA was launched in 2017. As previously highlighted, unlike the other ISAs, you have a limit of £4000 to invest here.
Whether you opt for a Cash Lifetime ISA or a Stocks and Shares Lifetime ISA, you should keep in mind that you can only withdraw money if you’re buying your first home or are over 60 years of age.
Innovative Finance ISA
The fourth and final ISA we’ll look at is an Innovative Finance ISA. Rather than sitting in your account as cash, with an Innovative Finance ISA your funds are lent to borrowers or businesses in what is known as peer-to-peer lending. This means that your Innovative Finance ISA doesn’t contain cash but rather contains P2P loans.
The idea is that you earn interest for lending your money out. As with all types of ISA, your interest isn’t taxed, however there is a risk that you could lose money if the businesses you’ve lent to can’t repay. Equally, it may take a while to take your money back due to the nature of the loan repayment process. The Financial Services Compensation Scheme does not protect P2P investments.
At rebuildingsociety.com we also offer a unique solution exclusively for business owners. A solution that allows you to invest in your own business through an Innovative Finance ISA.
Director’s Loan Account Innovative Finance ISA
Rather than lending your money to other businesses, a Director’s Loan Account Innovative Finance ISA allows you to use your ISA allowance to lend to your own business.
With the benefit of setting your own interest rate, having control of how your loan is used, and allowing your own business to grow and prosper as a consequence, it is the perfect solution.
What is more, not merely are you making a strategic decision to invest in your own business, but you are equally revolutionising your Director’s Loan Account. Ordinarily, any interest paid on director loans is taxable. What is more, payments are erratic and arrangements are informal. Formalising the loan and using an ISA wrapper changes this, making your investments work as hard as you do.
The loan must be arranged on genuine commercial terms. With no CT61 forms and no tax on interest, it’s simple!
We hope you have found this article useful. To find out more about our Director’s Loan Account Innovative Finance ISA or our Lender ISA get in touch today!
Equally, if you’d like to read more about the different type of ISAs and which is best for you, head to GOV.UK for a more comprehensive guide.
With P2P lending your capital is at risk. No FSCS protection. Returns may vary. Tax treatment varies depending on individual tax circumstances. This article should not be considered as providing financial advice.
