First introduced in 1999, Individual Savings Accounts (ISAs) are a little gift from the government to encourage more UK residents to save and invest. If you’re not familiar with how ISAs work or just want more info before you start your ISA journey, here’s a quick guide answering 5 frequently asked questions.
What’s an ISA?
An ISA is an invisible wrapper that you put around your savings and investments to stop the government from taking a portion of your earnings. Put simply, with an ISA you keep everything you earn after fees and charges are taken, meaning your money is working harder and you can enjoy more of your potential returns.
What are the different types of ISA available?
There are 4 main types of adult ISA: Cash ISAs, Investments ISAs, Lifetime ISAs, and Innovative Finance ISAs. And each tax year, you can only pay into one each of these ISAs.
They all have their own characteristics and knowing how they each work could help you choose which might suit you.
A Cash ISA is great way to save money and get tax-efficient interest payments. This means you don’t pay tax on any income you earn.
An Investment ISA (also known as Stocks and Shares ISA) lets you invest in a large number of assets (things like shares, bonds, commodities, and property) and you don’t pay any tax on any of your earnings or capital gains.
A Lifetime ISA allows you to save for your first home and/or retirement as long as you’re under 40. With a Lifetime ISA, you can hold cash, or investments, or a combination of both, and you don’t pay any Income Tax or Capital Gains Tax. Also, every month, the government will give you £1 for every £4 you put in, provided you meet the various conditions.
With an Innovative Finance ISA, you lend money to approved individuals and businesses via an online peer-to-peer lending platform. In exchange for providing loans, you get fixed interest payments and you don’t need to pay any tax on them.
How much can I contribute to ISAs?
So, how much can you put in an ISA? The total amount you can put each tax year in an ISA is limited – this is your ISA allowance. This year your allowance is £20,000 and the way you use it is up to you. You can either put it all in one ISA or split it between a number of ISA accounts. But keep in mind that you can only contribute to one of each type of ISA per tax year and the total amount you can put in a Lifetime ISA is £4,000. Whatever option you go for, you have until midnight on the 5th April of every year to use your annual ISA allowance so, make the most of it before the deadline passes, or you’ll lose it forever.
If it’s an ISA opened in the current tax year, you must transfer the full balance. Remember that any current year ISAs you transfer count towards your annual ISA allowance.
If it’s an ISA opened in previous tax years, you can choose to transfer the balance in full or in part, and it won’t count towards this year’s allowance. Let’s say you’re transferring £5,000 from an ISA opened last tax year and haven’t used this year’s allowance yet, then you’ll still be able to save or invest up to £20,000.
For every ISA transfer you want to complete, you MUST use the ISA transfer form. If you don’t, you’ll lose the ISA tax benefits.
Can I withdraw from an ISA?
You can withdraw money from ISAs, but you need to be aware of the implications of doing so. Some ISA products will have minimum tie-in periods, meaning you might lose interest payments or incur withdrawal penalties. If you hold a Lifetime ISA, you can take money out to buy your first home or when you turn 60 (or if you’re terminally ill). If you withdraw money for any other reason or before you’re 60, you’ll be charged 25% of the amount you take out.
Also, by withdrawing money from any ISA type, you’ll be losing some of your allowance. For example, let’s imagine you’ve used £5,000 from your annual allowance (£4,000 in a Cash ISA and £1,000 in an Investment ISA), and you’ve withdrawn £2,000 from your Cash ISA. You’ll still have £15,000 left to use from your ISA allowance, not £17,000. It’s worth knowing that some providers offer flexible ISAs which can allow you to withdraw funds and replace them at a later date without it reducing your annual allowance. There are some specific conditions attached so you’ll need to check these out if you think you might like to use a flexible ISA product.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.