Fundamentally, an ISA is a savings and investments ‘wrapper’, where you do not need to pay tax on any interest and profits gained.
Essentially, in the dark ages before ISAs, you would need to complete a tax return and declare any interest or profits made from savings and investments. By being tax-free, the ISA removes all that hassle and complexity.
For example, think of an ISA as a chest of draws. Any money you put inside that chest is tax-free. That means that you do not pay tax on any interest or earnings those savings make. Nice and easy for both you and the taxman, as earnings don’t need to be declared.
And it gets better. This essentially leaves more money in your savings pot. In turn, this bigger pot goes on to make more profit. And the longer you leave your money, the more powerful this effect becomes. This becomes incredibly powerful and is why ISAs are so attractive for savers and investors.
So, because of these benefits, ISAs are aimed at medium to long-term savings and investments. Therefore, don’t think of them as regular saving accounts which you can keep dipping in and out of. Most people won’t be touching their ISAs for a minimum of two years.