Your ultimate ISA guide 

Please remember that when investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you invest. Tax treatment depends on your individual circumstances and may be subject to change in the future. If you are unsure investing is the right choice for you, please seek financial advice.

Individual Savings Accounts (ISAs) are one of the most popular ways to save and invest in a tax-efficient way. ISAs offer a range of options for savers and investors to grow their wealth without incurring tax on the interest earned or capital gains made within the account. In this article, we’ll delve into what ISAs actually are, the different types of ISA, plus the current rules and allowances for ISAs in the UK.

What is an ISA?

An Individual Savings Account (ISA) is a tax-efficient savings or investment account available to UK residents over the age of 16. 

An ISA 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.

Types of ISA

There are several types of ISAs to suit different savings and investment goals:

Cash ISAs – Cash ISAs are savings accounts where you earn interest tax-free. They are suitable for individuals who prefer to save money in cash and want to protect their savings from tax.

Stocks and Shares ISAs – Stocks and Shares ISAs allow individuals to invest in a wide range of assets, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Returns from investments held within a Stocks and Shares ISA are sheltered from capital gains tax and dividend tax.

Innovative Finance ISAs (IFISAs) – IFISAs allow investors to lend money through peer-to-peer (P2P) platforms or invest in crowdfunded projects while enjoying tax-free returns.

Lifetime ISAs (LISAs) – LISAs are designed to help individuals save for their first home or retirement. Savers can contribute up to a certain limit each year, and the government provides a 25% bonus on contributions made, up to a maximum amount.

Help to Buy ISAs – Help to Buy ISAs were available until November 2019 to help first-time homebuyers save for a deposit. While new accounts are no longer available, existing holders can still benefit from the scheme until November 2029.

Why open an ISA?

Opening an Individual Savings Account (ISA) in the UK offers several potential benefits for individuals looking to save and invest their money in a tax-efficient way:

Tax-free returns – One of the primary benefits of ISAs is that the returns generated within the account are tax-free. Whether you earn interest on a Cash ISA or capital gains and dividends on a Stocks and Shares ISA, you won’t have to pay income tax, capital gains tax, or dividend tax on the returns earned within the ISA wrapper.

Flexible savings and investment options – ISAs come in various forms, including Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs, and Lifetime ISAs. This variety allows individuals to choose the type of ISA that best suits their financial goals, risk tolerance, and investment preferences. Whether you prefer the security of cash savings or the potential for higher returns through investments, there’s an ISA option available to match your needs.

Annual allowance – Each tax year, individuals are allowed to contribute up to a certain amount to their ISAs without incurring tax on the returns. As of the 2023/2024 tax year, the annual ISA allowance is £20,000. This generous allowance provides an opportunity for individuals to build significant savings and investments over time while enjoying tax benefits.

Flexibility – While some long-term savings and investment vehicles may have restrictions on accessing funds, ISAs typically offer flexibility in withdrawing money when needed. Many ISAs come with flexible features that allow you to withdraw funds and replace them within the same tax year without affecting your annual allowance, providing valuable liquidity.

Potential for higher returns – Investing in Stocks and Shares ISAs or Innovative Finance ISAs may offer the potential for higher returns compared to traditional savings accounts. While these investments come with risks, they also provide an opportunity for your money to grow over the long term, helping you achieve your financial goals, such as saving for a home, retirement, or other major expenses.

Transferable – ISAs offer the flexibility to transfer funds between different types of ISAs without affecting your annual allowance. Whether you want to switch between Cash ISAs and Stocks and Shares ISAs or consolidate multiple ISA accounts into one, you have the freedom to manage your savings and investments efficiently.

Inheritance and estate planning – While ISAs lose their tax-efficient status upon death and form part of an individual’s estate for inheritance tax purposes, spouses and civil partners can inherit their partner’s ISA savings without losing the tax benefits. This can be an essential consideration for inheritance planning and ensuring the financial well-being of loved ones.

Current rules and allowances

As of the 2023/2024 tax year, the following rules and allowances apply to ISAs in the UK:

• Annual allowance – The annual ISA allowance determines how much money individuals can contribute to their ISAs each tax year. For the 2023/2024 tax year, the ISA allowance is £20,000. This means that individuals can save or invest up to £20,000 across their ISA accounts without incurring tax on the returns.
• Flexible features – Many ISAs now come with flexible features, allowing savers to withdraw money from their ISA and replace it within the same tax year without affecting their annual allowance. Not all ISAs offer this flexibility, so it’s essential to check with your provider.
• Transfers – Individuals can transfer funds between different types of ISAs without affecting their annual allowance. For example, you can transfer money from a Cash ISA to a Stocks and Shares ISA or vice versa.
• Inheritance – ISAs lose their tax-efficient status upon death, meaning they form part of an individual’s estate for inheritance tax purposes. However, spouses and civil partners can inherit their partner’s ISA savings without losing the tax benefits. This is known as an Additional Permitted Subscription (APS).
• Eligibility – To open an ISA, you must be a UK resident aged 16 or over for Cash ISAs and aged 18 or over for Stocks and Shares ISAs, IFISAs, and LISAs.

These rules and allowances will of course change after the start of the next tax year for 2024/25. However, it’s important to remember the rules still in force ahead of the deadline. We will of course keep you informed about the latest rules and how you can get the most from your ISAs as the new tax year begins.

ISAs are a valuable tool for people in the UK to save and invest money while enjoying tax-free returns. With various types of ISAs available to suit different financial goals, understanding the rules and allowances can help individuals make the most of their tax-efficient savings and investment opportunities. As financial circumstances and regulations may change over time, it’s advisable to stay informed about any updates to ISA rules and allowances provided by HM Revenue & Customs (HMRC) and seek professional financial advice when needed.