Add valuable digits to your bank account with a fixed rate ISA

February 11, 2013

For small businesses, the self employed and even consumers who want to keep a track of their finances, an accountant is their irreplaceable right-hand man. Thanks to their in-depth knowledge of how the tax burden in a company or a sole proprietorship can be minimised, you will be able to protect your profits in a fixed rate ISA, a unique form of bank account with countless added benefits.

Currently, the law states that you can have a cash ISA with a value of up to £5,340. Once the interest has accumulated on the lump sum you have in the bank, the dividend you receive won't be tax deductible - allowing you to make the most out of your hard-earned money. As the interest rate on an ISA can also fluctuate throughout the year, selecting a fixed rate account will allow you to estimate with certainty how your deposit will grow over the next two months. However, if you set your interest rate at 3.7 per cent for the next year, there's a chance that you could miss out on the best savings rates if the Bank of England revises its macroeconomic objectives.

Any accountant will advise you to think about a cash ISA thoroughly before leaping right in and signing those all-important application forms. Before you begin to shop around for the finest deals on price comparison websites, preparing a three or five-year plan for your money is an excellent idea. If you have £5,000 in savings, ask yourself the following questions:

  • Am I planning to spend these savings in the next three years?
  • In a financial emergency, would I need to rely on these savings for financial stability?
  • If I am made redundant or become unemployed, will I need my savings as a form of income until I am back in paid work?
  • Will I build the amount of money I'm saving in the next three years?

The reason why these questions are important is because you need to determine the length of time your savings will be held in a cash ISA. As a rule, an account with a three-year term will offer far more generous interest rates than a 12-month alternative. However, as mentioned earlier, this isn't a decision you should take hastily. There can be restrictions on how much you can withdraw on an annual basis (with some banks not allowing you to remove money from the ISA at all). Also, if you decide to close the account prematurely, you could be penalised by losing 90 days of credit - or, in some cases, forfeiting all of the interest you have accrued since the account opened.

What about stocks and shares ISAs?

Current UK laws state that you can have £10,680 in assets tied up into ISAs in total: £5,340 in cash, and £5,340 in stocks and shares. Some consumers only opt for bank accounts because they prefer the safe method of benefitting from tax-free savings, but don't forget the impressive rewards that can be gained through acquiring the correct stocks and shares with advice from investors.

Unlike cash ISAs, which guarantee that you won't have to pay tax if you are within the £5,340 limit, you will be expected to have some tax deducted from your earnings from stocks and shares if they fall into certain categories. Because of this, contacting an accountant is worthwhile to ensure that you are making the correct contributions to HMRC. The last thing anyone wants is to pay too little and be faced with a large bill for unpaid tax in the future, while also having profits siphoned away from your bank balance unnecessarily.

Interestingly, whereas you can only use 50 per cent of your ISA allowance in the form of a savings account, all £10,680 of your allowance can be used for stocks and shares. Exploring this exciting way to invest your money is worthwhile if you are prepared to accept the risks of losing value from your portfolio. Unfortunately, unforeseeable circumstances could mean that your shares depreciate as well as appreciate, and this is why seeking advice from a portfolio specialist so you can anticipate any downfalls will help. In addition, consider these ISAs as a long-term financial decision, as the success of the entities you back may only strengthen and prosper over time. If you can, having at least 20 per cent of your portfolio value in cash savings can protect you financially if a worst-case scenario is realised.

Other ways an accountant can help your savings to grow

An accountant will always offer advice that is in your best interests, ensuring that you can prepare your accounts meticulously so savings accounts are possible. If you work for yourself, structuring your business and planning your cash flow can enhance the financial viability and profitability of your venture. In these challenging trading conditions, that isn't something to be dismissive about.

Also, don't forget that improving your bookkeeping can allow you to categorise the expenditure in your professional and personal life. If you believe you're spending too much on food, travel or clothing, why not set limits and goals, using the cash that you save to build your ISA? As many of these accounts allow you to make deposits on a regular basis, you could even set a standing order from your current account every month and see your savings build over the course of a year.

Key variables when finding the right ISA for you

In addition to considering what your accountant has to say, remember to look for the following features from the dozens of ISAs on offer right now from high street banks:

  • The ways you can access information about your ISA. Whereas traditional ISAs may only be accessed by telephoning the customer services desk of the financial institution you bank with, other accounts may be exclusive to online customers. These Internet-based ISAs usually have favourable rates because it cuts the cost of dealing with you in-branch.
  • The minimum investment which is required upon opening your bank account. Whereas some cash ISAs only require for you to deposit £1 into your account throughout the year to receive interest on 5th April, other accounts with higher-than-average interest rates may need a minimum investment of £1,000 as a caveat for the greater returns.
  • Introductory bonuses that can allow you to make even more tax-free gains in the short-term. Some ISAs, in addition to an AER of three per cent, offer an additional bonus of up to 1.5 per cent for the first 12 months. Once this honeymoon period expires, many consumers then select a new ISA with another introductory bonus, allowing you to be savvy with your money and maximise your returns.

So, the challenge now is finding an accountant who will be able to protect your financial interests, and ensure that the savings you have built are working for you. This way, the value of your money will increase in real terms, with the threat of inflation ever looming.