Top 10 myths about… ISAs

Danny Cox explores the 10 popular held misconceptions about ISAs.

1. ISAs are complicated

If you're already familiar with how savings and investments work, all you need to know about ISAs is they are simply a wrapper that shelters any gains from tax.

There are many types of ISA, including cash and stocks and shares. A cash ISA works in the same way as a savings account, except you pay no tax on any interest earned. With a stocks and shares ISA, you pay no tax on income or capital gains tax on profits.

The ISA allowance is £20,000 in the 2023-24 tax year, and you can put money into more than one type of ISA.

2. ISAs are expensive

For many investors, owning funds is no more expensive in an ISA, so the tax wrapper and the benefits are free.

3. I can't withdraw money from an ISA easily

Unless you have chosen a fixed-term ISA, you can normally withdraw your money at any time. Remember, if you choose a stocks and shares ISA, you should be investing for at least five years.

4. It is time-consuming to open an ISA

With many ISA providers, you can open your ISA online or by phone in less than 10 minutes.

5. ISAs aren't worth the effort

If you already have cash savings or investments, using your ISA allowance stops the taxman from taking a slice of your profits.

6. You are only allowed to have one ISA

Your cash ISA and stocks and shares ISA do not have to be with the same company. Each new tax year, you can choose to save or invest with any company you like, regardless of who you may have opened an ISA with previously.

But holding different ISAs with different companies can make them difficult to manage. That's why investment platforms have proven extremely popular. They allow you to pick and mix investments from major investment companies and hold them all in one account.

7. I’ve got savings in a deposit account, so I don't need an ISA

Savings accounts are taxed, but ISAs are not. Everybody earns interest tax-free in a cash ISA. If you choose a stocks and shares ISA, you pay no tax on income or capital gains tax on profits.

8. It is better to wait until the end of the tax year to open an ISA

Investing at the start of the tax year means you’ll get up to 12 months more tax savings on interest, income, and growth from an ISA than if you leave it until the end of the tax year.

9. Opening an ISA means investing in the stock market

If you do not wish to invest in the stock market now, you should still make full use of your ISA allowance. Invest in a cash ISA, so you can wait and make your investment decision later.

10. Opening an ISA means completing a tax return

ISAs do not have to be recorded on your tax return, so not only do they save you tax, but they also make your life easier.

Financial advice can help if you’re struggling to make vital money decisions. If you have any doubts about how to make the most of your ISA, pension and financial plans, it's worth seeking advice.

Please note: tax rules are subject to change over time, and the value of any tax benefits will depend on your circumstances. Also, the value of investments can fall as well as rise, so if you invest in a stocks and shares ISA, you could get back less than you invested.