01 March 2021

Still unsure about Isas? An expert busts 4 common myths

01 March 2021

This time of year is often known as ‘Isa season’. This means that, with the end of the tax year approaching on April 5, many savers will be be mulling over whether or not to top up their Isa, or looking to open a new one.

But there can be a lot of myths and misunderstandings about whether these accounts, which ringfence your savings from the taxman, are worthwhile, and how exactly they work.

Here, Sarah Coles, a personal finance analyst at Hargreaves Lansdown, runs through some of the different types of Isa which are available, and busts some of the common myths surrounding them…

Cash Isas

Myth: ‘I don’t pay tax on my savings anyway’

“The year after the personal savings allowance was introduced in 2016, over 1.5 million fewer cash ISAs were opened. Savers decided that because the first £1,000 of interest is tax-free for basic rate taxpayers, they didn’t need to bother,” says Coles.

“But putting money in a cash ISA isn’t just about saving tax today, it’s about protecting your money from tax in the future too. If a pay rise pushes you into a higher tax bracket, your tax-free savings allowance drops to £500 for higher rate taxpayers and disappears altogether when you become an additional rate taxpayer. If rates rise or the savings allowance is cut, you could face tax on your savings far sooner.”

Stocks and shares Isas

Myth: ‘I don’t pay tax on my investments anyway’

Young woman at home going through her personal finances

“If you’re just starting out, you’d be forgiven for thinking that you’ve got plenty of room within your allowances, but you’ll be surprised how quickly gains can add up over the years,” says Coles.

Junior Isas for children

Myth: ‘You shouldn’t take a risk with your child’s investments’

Coles says: “Some parents think of stock market Junior Isas as risky, because they’ve seen share prices fall significantly at various times – including this time last year. It’s why 70% of Junior Isas are held in cash.

“However, while the value of your investments will rise and fall in the short term, a Junior Isa is for the long term of up to 18 years, when they usually have time to ride this out and take advantage of long-term growth.”

Lifetime Isas, which help people save for their first home

Myth: ‘I’m not planning to buy property for a while, so I don’t need one’

“There are two time limits that mean you should open a Lifetime Isa as early as possible. Over the short term, you need to have had it open for 12 months before you buy a property,” says Coles. “Over the long term, once you hit 40, you can’t open a Lifetime Isa. So getting started now could protect your right to have a Lifetime Isa.”

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