What is an ISA? – our 2024 Guide to ISA accounts

The answer to, “What is an ISA,” is that an ISA (Individual Savings Account) is a type of savings account that allows you to grow your money in a tax-efficient manner. It’s a simple scheme set up by the government to help savers and investors make their money go further. In this Moneyfarm ISA guide, we will tell you all you need to know about ISAs.

Tax-free savings

The UK government introduced the ISA to encourage saving and growing your money for your future easily.

What is an ISA? It is a simple account that protects your savings and investments within a tax wrapper. This means that any returns from a savings account or your investments and any income will be shielded from tax. This is the most significant of the ISA incentives.

You could be eligible to pay tax on your returns whenever you save or invest money. If you pay the higher income tax rate, you’ll pay a capital gains tax of 20% on the profit you make when you decide to withdraw that money. Everyone has an annual capital gains tax allowance of £12,300 in the 2022/23 financial year, but this drops to £6,000 from the 2023/2024 tax year following changes made to the Autumn budget in 2022.

You may also be eligible to pay tax on any income you receive from your investments. The tax rate depends on whether this income is generated as a dividend from equity investments or interest from fixed income.

However, if you invest in an ISA, you won’t pay tax.

For example, if you invest £20,000 – the full ISA allowance – into a general investment account for 20 years, splitting it into monthly payments.

If your investments return 3% yearly, you could have a pot worth over £547,000. If you pay the higher income tax rate, you would have to pay over £27,000 in tax when you sell your investments. If you invested in an ISA, you would keep every penny of your £547,000.

What is an ISA, and how does it work?

An ISA is best described as a wrapper that protects your savings and investments from the taxman. So, whether you decide to save or invest, all the interest, income and capital gains generated from the money you put in your ISA can grow tax-free.

The annual allowance for 2022/23 is £20,000, which means you can put up to this limit in your ISA each tax year. The tax year runs from 6 April to 5 April the following year.

There are two main types of ISA: the cash ISA and the stocks and shares ISA. In addition, you have several other options to choose from, including the Lifetime ISA (LISA), Junior ISA (JISA) and Innovative Finance ISA (IFISA).

A cash ISA allows you to build up your savings in a tax-efficient manner. When you save money in a cash ISA, your provider pays you interest on your savings, which is tax-free.

A stocks and shares ISA allows you to invest your money through the ISA wrapper, shielding any returns from tax. So, making the most of your annual allowance each year can help you maximise your returns over the long run.

You can invest or save your allowance in as many different types of ISAs as you like, but only in one of each type each tax year.

This means you can put £10,000 of your £20,000 ISA limit in a stocks and shares ISA and £10,000 in a cash ISA, but you cannot split this between two different stocks and shares ISAs.

If you’ve already started investing in a stocks and shares ISA in a tax year but want to move, you can transfer your ISA to a different provider, but this will close your original ISA account.

What is an ISA allowance?

The ISA allowance is the maximum amount you can contribute to all ISAs in any one tax year. For the 2023 – 2024 tax year, the allowance is £20,000. This means you can invest up to £20,000 in your ISA, and any returns on this money will be tax-free. Remember, you can spread your £20,000 allowance across the various ISA types.

When investing in an ISA, you have two options: use it or lose it. You’ll lose any unused allowance if you don’t invest all of your £20,000 ISA allowance before the new tax year on 6 April 2024. This can make a real difference over the long term.

The ISA allowance is reviewed each tax year. It increased to £20,000 in 2017 from £15,240 and will remain at this level throughout the 2023/24 financial year. When introduced in 1999, the ISA allowance was just £7,000.

The most significant ISA rule change came in 2014 when restrictions on how much to invest in an ISA were relaxed. Since then, Brits can split their ISA allowance as they see fit.

The 2023/2024 tax year ISA deadline

As previously mentioned, the answer to “How much can you put in an ISA in the 2023/2024 tax year” is £20,000. The tax year ISA deadline is midnight on 5 April 2024. As the ISA allowance does not roll over, your money needs to be in your ISA account by this cut-off, or you will lose your ISA allowance for that tax year.

The annual ISA allowance is set by tax year, so you have from 6 April to 5 April the following year to invest your £20,000 ISA allowance.

What is an ISA allowance, and can it be split?

Since 2014, rules on splitting money between different types of ISA have been relaxed. It is now possible to pay the entire £20,000 allowance into a single type of ISA or a mixture of them all. However, you cannot pay into more than one of the same type of ISAs in the same tax year (two different stocks and shares ISAs, for example).

Types of ISA

The are 4 main different types of ISA (Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, and Lifetime ISA).

Cash ISA

A Cash ISA is like an ordinary savings account without the tax. There are different cash ISAs to meet different needs, such as instant access and fixed interest rates. You can open a cash ISA with most high street banks and building societies, but you can only put money in one cash ISA each year.

Although cash has traditionally been viewed as a ‘safe’ place to keep your money, the low returns available on easy-access cash ISAs mean your money is probably losing value to inflation rather than growing for your future.

This is why more Brits are looking to the stock market to protect their money from inflation. However, if you have a short-term horizon or want to take on less risk, a Cash ISA may be the most appropriate ISA for you.

If you choose a Cash ISA provider, you should consider any hidden fees for transferring or withdrawing your money early, as some fixed-term cash ISAs will charge for this.

Stocks and Shares ISA

Of all the different types of ISAs, a stocks and shares ISA is probably the most suitable for you if you’re looking for a simple, tax-efficient way to grow your money in the financial markets.

Profits will not be subject to capital gains tax, and interest earned on bonds or dividend income will also be tax-free. At present, you can only pay into one stocks and shares ISA each tax year, but from April 6, 2024, you’ll be able to pay into as many as you like.

In theory, stocks and shares ISAs can hold a wide range of investments, including company shares, bonds, investment trusts, and funds—it’s one of the best stocks and shares ISA incentives—although this will depend on your provider. In addition, some providers let you manage your ISA portfolio yourself, picking exactly which investments to hold and when to buy and sell them.

This suits many investors, but it takes a lot of skill, time and knowledge to manage your investments in line with your appetite for risk and investment goals. This is why many investors choose to have the experts do it for them instead.

Wealth managers like Moneyfarm provide fully managed portfolios that are built and managed in line with an investor’s appetite for risk. Advancements in technology mean Moneyfarm ISAs can be delivered at a lower cost than some competitors. It’s important to shop around to ensure you’re getting the best value for the service you need – a wealth manager who does everything for you will likely be more expensive than a provider who makes you do it all yourself.

Moneyfarm Stocks & Shares ISA

The Moneyfarm Stocks and Shares ISA is flexible and fully managed. It offers a range of benefits for anyone looking to truly make the most of their ISA allowance. At Moneyfarm, we blend low-cost investing and the simplicity of a digital adviser with the personal relationship and guidance of a traditional wealth manager.

Our digital advice, human-led investment guidance, and fully managed portfolios put our customers in the best position to reach their financial goals, whether that’s through an ISA, pension, or general investment account. If you are thinking of long-term financial goals that will suit your retirement plan, you should consider SIPPs or ISAs for tax-free savings.

We keep our fees low, leaving you with more of your money, and we will never charge you for transferring to our ISA. Find out more about the Moneyfarm Stocks & Shares ISA today.

Lifetime ISA

The Lifetime ISA (LISA) is designed to help people under the age of 40 save for their first home or retirement.

The advantage of a LISA is simple – the government will pay you a bonus of 25p for every pound you pay up to the limit of £4,000 a year – as ISA incentives go, this can be very significant for first-time home buyers, but the rules around these ISAs can be complicated. Some of these rules of LISAs include:

• You can only open a LISA if you are between the ages of 18 and 40
• You cannot pay into a LISA after you turn 50, although you can still allow your money to accrue interest.
• You can only use the savings pot to buy your first home or use it for retirement from the age of 60, or if you are terminally ill; otherwise, it’s locked up.
• You will be charged 25% of what you take out if you withdraw your money early. This means you would get less than you had initially put in if you accessed your money early.
• The property you purchase with LISA savings must cost under £450,000 and must be bought with a mortgage. You also must not own a property already.
• The LISA counts towards the £20,000 a year ISA limit.

It is crucial that you assess whether a LISA or a pension is the best option for you in terms of saving or retirement. Pensions often offer more benefits and more protection, although you can have both.

Despite the ISA incentives that LISAs provide, Moneyfarm does not offer one.

Help to Buy ISA

The Help to Buy ISA was like a LISA. It’s a type of cash ISA where you could, until recently, make an initial deposit of £1,000 and then save up to £200 a month (£2,400 a year). You received a 25% bonus on savings up to £12,000, which equates to five years of saving if you put away the full amount each month. This means you could have gotten up to £3,000 from the government for free.

The opportunity to open a Help to Buy ISA is now closed. They haven’t been available to new savers since 30 November 2019, although existing savers will be able to keep saving into their accounts. However, they must claim the government bonus before 1 December 2030.

Innovative Finance ISA

To encourage peer-to-peer lending and improve competition in the banking sector, investors who lend to companies can enjoy tax-free income through an innovative finance ISA (IFISA).

If you want to invest in a small business, you should look to an innovative finance ISA to protect your returns from the taxman.

The IFISA is designed to boost investment in small businesses. You can earn up to 6% interest tax-free when you invest through this ISA. Like a bank manager, you lend to people and fledgling businesses.

They’ll pay you back over time with interest if all goes well. But, if they don’t, you could lose money.

There are very few IFISAs on the market. With the possibility of higher returns also comes greater risk – with peer-to-peer lending, you’re essentially taking on the gamble and loaning to businesses that large banks won’t. You could take a hit if you want to access your money at short notice, as these are long-term investments. Also, your cash won’t be protected by the Financial Services Compensation Scheme (FSCS).

Junior ISA

If you want to save for your child or have guardianship over someone under the age of 18, you can put up to £9,000 in a junior ISA (JISA) for them each year. Much like the adult ISA, savings can go into either a cash or stocks and shares ISA or be split between the two. Conduct a cash ISA vs stocks and shares ISA comparison to make the best choice.

It is also important to remember that as soon as your child turns 18, the money will be theirs to use. Parents should conduct sufficient research to determine if a junior ISA is the best place to save money for their child’s future. Children born between September 2002 and January 2011 can convert their Child Trust Fund (CTF), which they were automatically enrolled in at birth before they transfer to a Junior ISA. It is no longer possible to open a CTF.

ISA Frequently Asked Questions

ISA vs Savings Accounts

Whether you save money in a savings account or an ISA depends on your financial situation, goals, and when you want to use your money. When evaluating ISAs vs savings accounts, it’s important you understand your investor profile, which considers how much risk you are willing to take on.

If you’re investing for the short term, keeping your money in a cash ISA or savings account is probably more appropriate. Your savings won’t grow by very much, but you should protect the value of your money from any short-term swings in the financial markets.

If your time horizon is over two years, you might want to consider investing in a stocks and shares ISA. Of course, what you invest in will depend on your investor profile – if you’re a risk-averse investor who wants their money out in five years, you’ll take on less risk than someone who is investing for retirement in 30 years and is happy to take on more risk. The longer you have to invest, the more risk you can take with your investments, as you should be able to stick out any short-term fluctuations in the markets.

What are the ISA incentives and benefits?

There are a variety of ISA incentives, they include:

• Generous tax benefits– This is the big one. The freedom to watch your money grow without being taxed is a major advantage.
• Flexibility– The choice and flexibility of transferring between different types of ISAs give Brits better control of their money.
• Free and easy transfers– Improvements in the industry have made transferring between different providers easier, quicker and hassle-free. With a company like Moneyfarm, transferring is free.

What happens if you take money out of your ISA?

The rules for withdrawing money differ depending on what kind of ISA you’ve paid into.

• Stocks and Shares ISA – You can withdraw and return money within the same tax year. Make sure you know any fees you might need to pay for withdrawing money from your ISA. At Moneyfarm, there are none – just a simple management fee and an underlying fund fee.
• Fixed-rate cash ISA – This offers more competitive interest rates in exchange for locking up your money for a certain period. Withdrawing early will usually incur a penalty charge.
• Easy access savings ISA – This type allows money to be withdrawn and returned freely, although usually at a lower interest rate.

What happens to your ISA if you move abroad?

If you decide to move or relocate abroad, you must think carefully about what to do with any ISAs you’ve already set up. Since ISAs are regulated by the government and are designed for residents of the United Kingdom, relocating overseas could complicate things.

When you become a non-UK resident, you can still keep any existing ISA, and you will still receive UK tax relief on any money or investments kept there. However, you will not be able to add any more funds after the tax year in which you moved. The exception to this rule is for Crown employees; they are allowed to deposit money into their ISA accounts while living abroad.

You can’t open a new ISA account while you are away. However, you can open a new ISA account and fund your ISA once you return to the UK as a permanent resident. If you are moving permanently, you may consider closing your account and transferring your investment abroad.

You should notify your ISA provider as soon as you emigrate because providers have different terms and conditions governing such a situation. It is also possible that the country you migrate to does not recognise an ISA as tax-exempt. This means that you might have to pay tax on returns there, so get in touch with your local tax authority for more information.

Can I open an ISA for someone else?

In most cases, you will not be able to open an ISA for someone else. For instance, a parent can open a junior ISA for their child and pay into it each year. However, at the age of 16, the child will have control over the ISA, and when they turn 18, it will become theirs to use, converting to a regular adult ISA.

The only other scenario explained in this ISA guide concerning opening an ISA on someone else’s behalf is if they are unable to do so themselves due to, for instance, disability or old age, and you have the legal power to make financial decisions on their behalf. If you’re unsure, get in touch with one of our qualified investment advisors if you need more help.

ISA Guide UK residents can use regarding how to open an ISA

Opening an ISA is simple. All you need to do is follow the six easy steps below:

1. Discover your investor profile – Your financial situation, risk appetite, and time horizon will influence what type of ISA you put your money in (stocks and shares or cash, for example)
2. Research the best ISA for you – Comparison sites are a good place to start to compare different ISAs to ensure you’re getting the best deal, whether that’s around fees, wealth management service, returns or interest rates
3. Open an account – Opening an account is simple and can usually be done in under 10 minutes. It requires basic information like your National Insurance number, tax information, bank details and the required amount of money to meet minimum thresholds.
4. Build the right investment portfolio – If you decide to invest in a stocks and shares ISA, it’s important you build your portfolio with the right investments for your investor profile and financial situation. At Moneyfarm we recommend the right ISA portfolio for you, built and managed by our experts to help your money grow.
5. Add money to your account – Add money to your ISA by a lump-sum payment, setting up a direct debit transfer, or transferring an old ISA
6. Run regular ISA check-ups – Make sure you regularly check your chosen ISA is still the best option for your financial situation and financial goals. This might change over time, and you might find yourself using a blend of different ISA types at different stages of your life.

Guide to ISA transfer

Here’s a simple checklist if you’re unsure whether it’s time to move your ISA.

• Is the return on your ISA lower than inflation? The purchasing power of your savings could be shrinking over time. You might want to think about a stocks and shares ISA as these have a better chance of beating inflation over the long term.
• You don’t have the time to manage your own money. You could be missing out on the important things in life because it’s taking you hours to manage your savings or investments. A provider like Moneyfarm does it all for you.
• Costly fees: Your ISA could be costing you a small fortune in fees, or you’re not even sure what you’re paying. Fees should be transparent and low-cost.

You can transfer any type of ISA to Moneyfarm, whether it’s a cash ISA or a stocks and shares ISA. If you’re transferring an ISA in the same tax year, you’ll have to move the whole thing. With older ISAs, you can choose how much you want to transfer.

It can take up to 30 days to transfer your stocks and shares ISA from your current provider to Moneyfarm. We won’t charge you anything to transfer in or away from Moneyfarm, but your existing provider might.

The Moneyfarm Stocks and Shares ISA will always be low-cost and flexible to ensure you keep more of your money. You’ll also be able to dip in and out as you need throughout the tax year without incurring withdrawal fees.

Opening a Moneyfarm Stocks & Shares ISA

Opening a Moneyfarm Stocks and Shares ISA couldn’t be easier. Simply create an account and fill in your details; we will use your details to determine your investor profile and match you to the right portfolio for your needs.

What’s more, we won’t charge you a penny if you are transferring from another provider.

Our ISAs are popular with investors because they are flexible, cost-efficient and fully managed. Moneyfarm blends digital advice with human guidance to put our investors in the right position to reach their investment goals. Fully transparent, our investors always know what they are invested in, their performance and how much they are paying.

Are ISAs safe? Moneyfarm is authorised and regulated by the Financial Conduct Authority (FCA), making your stocks and shares investments safe.

FAQ

Who is eligible for an ISA in the UK?

Individuals who are at least 16 years old are eligible for a Cash ISA in the UK. You must be 18 or older for a stocks and shares ISA, innovative finance ISA, or Lifetime ISA. If you’re under 16, you can’t open an ISA account yourself, but you can still get help from your parents.

Do you need to be British to have an ISA?

You must be a UK resident to open an ISA account, mainly for tax purposes. If you are British but don’t reside in the UK, you cannot open an ISA account. However, there are some exceptions.

What happens to my ISA when I die?

When an individual dies, their ISA gets closed, and the funds held within it are no longer accessible. If a beneficiary is named, the ISA investments may be transferred to that person’s ISA or sold. If no beneficiary is named, the funds in the ISA will typically become part of the deceased’s estate and will be subject to inheritance tax. It is important to check the terms and conditions of the ISA and/or consult with a financial advisor or solicitor for more information.