The end of the tax year is fast approaching, and investors are accordingly even more eager than usual to make sure
they are making the best use of their annual tax-free savings allowance. The UK tax year ends on the 5th of
April; investors wanting to enjoy tax-free gains on their investments in the years ahead need to have their cash
allocated by this deadline. One of the most tax-efficient ways to see your hard-earned savings grow over time is to
put them into an Individual Savings Account, more commonly known as an ISA.
These accounts have one major advantage over other saving accounts – they allow you to receive tax-free interest
payments on the cash invested within them. This article serves as a primer on why ISAs are such a great way to
save and invest in a tax-efficient way, as well as covering the main questions investors will be asking themselves
at this important time of the year about which type of ISA might suit them best.
What is an ISA?
Since their introduction back in 1999, ISAs have dramatically ballooned in popularity and have gone on to become an
essential tool for everyone who takes responsibility for their personal finances. This is because these
accounts benefit from a highly favourable tax status which makes them the best option for most savers.
Essentially, savers pay into an ISA from their earnings after tax, but once inside the ISA these funds are then
protected from income tax or capital gains.
This means that by holding investments within an ISA, you can legally avoid taxes on both the income the investment
generates, as well as taxes that would have been due on any increase in the value of the investment itself.
Even better still, no tax is payable on any money withdrawn from the account, and there is no restriction on when or
how much money can be withdrawn.
The ubiquitous and well-deserved popularity of the ISA is revealed by recent research by HM Revenue and
Customs. As the chart below shows, nearly 40% of the British population hold at least one ISA, with an average
savings value of around £30,000 contained within.
If anything, this figure is slightly lower than could be expected given the tremendous advantages of
the ISA outlined above, but even in an economy as financially literate as the UK, not everyone chooses
to take advantage of the tax breaks on offer.
There is one drawback to the ISA however, and that is that the tax-efficient nature of the scheme means
that the government enforces a £20,000 annual limit to how much cash can be paid into ISAs. Hence the
supreme importance of the looming tax year deadline – if you don’t use your annual allowance of £20,000
before the 5th of April, you will have lost the chance to do so for the 2021/2022 year! The allowance does
not ‘roll over’, and once the deadline passes you will have lost the chance to invest up to £20,000
How do you become an ‘ISA millionaire’?
A well-known, although possibly apocryphal tale, has Albert Einstein replying to the question, ‘What is
mankind’s greatest invention?’, with two simple words: ‘Compound interest’. Whether or not this
conversation actually happened is irrelevant – the wisdom contained in Einstein’s supposed answer is
genuinely timeless! If you keep re-investing your interest payments into the underlying investment, the
compounded rate of growth will bring you much higher returns than would have been possible if you kept
withdrawing and spending your interest payments.
ISAs can be considered simply as
‘wrappers’ or ‘containers’ for investments, similar to other forms of account offered by banks and
brokerages. What makes the ISA stand out is that it is such an effective wrapper within which to hold
your investments from the point of view that they allow you to minimise your tax burden and they allow you
to take advantage of the fantastic possibilities of compounding.
To give a simple example, £20,000 invested at a rate of 10% per annum would allow you to receive, if you so
wished, an annual income of £2,000 from your investment. Whilst this would be a welcome flow of
passive income, it certainly isn’t a life-changing amount. However, if you chose to leave that £2,000
in your ISA and reinvest it, you would be a millionaire in approximately just 20 years, assuming a similar
rate of return over the whole period.
The current estimates are that the UK has around 2,000 so-called ‘ISA millionaires’, by which is meant
ordinary savers who simply kept reinvesting their interest payments and let the miracle of compounding do
the rest. If you can invest your £20,000 annual allowance before the 5th of April deadline, then you can
simply sit back and watch the value rise, safe in the knowledge that you are protected from capital gains
tax due to your savvy use of the ISA as a tax-efficient ‘wrapper’.
What is an Innovative Finance ISA?
There are four types of ISA, each with a different purpose and target audience.
A cash ISA is the closest one to a traditional savings account and will offer an interest rate closely
correlated to the base rate set by the Bank of England. Currently this is 0.5%, and with interest rates as
low as this even the miracle of compounding is still going to need many, many decades before a reasonable
return has been generated.
Stocks & shares ISAs allow savers to hold equities and other conventional forms of investment within an
ISA. These accounts suit investors who are happy to manage their own money and are willing to tolerate the
large swings in valuation that punctuate the stock markets’ progress.
Then there is a lifetime ISA, which is similar to a pension and has much stricter restrictions on how much
can be paid in and when it can be withdrawn.
Finally, there are innovative finance ISAs (IFISAs). These seek to allow ordinary savers access to superior
returns than can be generated by any of the above types. They do this, as the name suggests, by allowing
more dynamic and innovative forms of finance to be contained within the ISA wrapper than was possible
One of the most significant improvements to the financial landscape of recent years has been the rise of
peer-to-peer lending. This is when entrepreneurs or established companies who have a specific investment
proposition are matched up directly with savers who are willing to lend in search of a market-beating rate
of return. The key advantage of this approach is that by cutting out banks, who are the traditional
middlemen acting to bring borrowers and lenders together, costs for both sides of the business deal fall,
and accordingly higher rates of return can be earned.
Average returns on IFISAs have now been above 9% for the past two consecutive years, and it is this track
record of healthy returns that has served to make IFISAs one of the fastest growing sections of the overall
Introducing the Shojin IFISA
The Shojin IFISA allows you to unlock the full potential of your £20,000 annual ISA allowance.
Through our ‘in-house’ IFISA you can invest in a wide range of real estate projects both in the UK, which
are listed on our investment portal. We extensively vet all the projects we propose to our clients, and
following our unique co-investment model we invest our own money alongside you. We do this because we
believe our market-leading research and analysis teams can discern which are the best projects out there,
and we see ourselves as partners with our clients. We benefit most when our clients see a strong return on
Importantly, once cash has been committed to an ISA, as well as being withdrawable it can also be
transferred directly into a new ISA. If you are convinced of the need to diversify
your portfolio to minimise the damage that rising inflation is doing to your returns
, there are no
better options available than real estate. You are able to transfer any existing ISAs and invest up to
£20,000 in the last months of the 2021/22 tax year into Shojin’s IFISA and benefit from tax savings on any
returns you receive.
Setting up an IFISA through our online platform is quick, simple, and best of all free.
Opening an account takes a matter of minutes, and our user-friendly interface combined with support from
our customer service representatives makes the experience clear and easy.
You can invest from as little as £5,000 into Shojin’s real estate projects, but you need to act before the
deadline of April, 5th.
Open an account today, and start your journey towards becoming an ISA millionaire.