Posted in:

Flexible ISA: What is ISA Flexibility And What Are Its Rules

ISAs became flexible in April 2016. The flexibility was a big announcement in the 2015 Budget, and it revolutionised the savings and investment industries. But we’re now in 2024, and a surprising number of ISA providers don’t offer a flexible ISA option.

Can I transfer a flexible ISA?Yes, but it depends on the type of flexible ISA
Are all ISAs flexible?No, only Cash ISA, Stocks and Shares ISA, and Innovative Finance ISA are flexible
The disadvantage of a flexible ISA transfer?Not all ISA providers offer flexible ISAs
How do I know if my ISA is flexible?Check the terms and conditions or speak to your ISA manager


What is a flexible ISA?

A flexible ISA is an account whereby you can withdraw from your individual savings account (ISA) and still be able to use that portion of your ISA allowance in the same tax year.

The current year’s ISA allowance is £20,000. Previously, if you had used your full £20,000 ISA allowance but suddenly needed £2,000 for house repairs, you would sacrifice £2,000 of your ISA allowance. Even if you want to put the £2,000 back in a few months later, you wouldn’t be able to. With the flexible ISA, you would be able to put that £2,000 back into your ISA when you can afford to within the same tax year and still enjoy tax-free benefits on income tax, capital gains tax and dividend tax.

Flexible ISA allowance rules

As you now know, a flexible ISA means that you can put money back into an ISA without affecting your £20,000 annual ISA allowance. You can also take out more money than you put in within the same tax year, creating a flexible allowance.

For instance, let’s say you currently have £65,000 invested in a cash ISA. £55,000 is from your ISA contributions over the past six years, while £10,000 is a deposit made into the current tax year’s account. You are left with a £10,000 ISA allowance for the current year. If you withdraw £15,000 from your ISA, you can add back £25,000 to the same account in the same tax year. The amount of £25,000 is the £15,000 you withdrew plus the rest of your unused ISA allowance (£10,000) for the year.

However, if you withdraw the full ISA annual allowance, you can pay it into any current ISA account, but you can only pay it into one ISA account.

Please note that ISA tax rules may change due to policy changes, and its effect will vary according to individual circumstances.

Are all ISAs flexible?

Flexible ISA withdrawals apply to most ISAs. There are flexible cash ISAs, flexible stocks & shares ISAs, and flexible innovative finance ISAs. As long as you have cash investments within the ISA, ISA flexibility is possible. However, it’s up to individual providers whether or not they offer this service. Therefore, you should check your ISA provider before investing in an ISA, especially if you believe you will need this feature in the future.

See what you could earn with Moneyfarm’s Stocks & Shares ISA

Lifetime ISAs (LISAs) are a little more complicated. A LISA is not a flexible ISA, and withdrawals come with certain conditions. For example, if you withdraw money from a lifetime ISA before its term ends, you’ll lose the 25% government bonus earned on the amount withdrawn. To avoid this penalty, lifetime ISA withdrawals come with specific rules and age restrictions. For example, you are only allowed to withdraw money from a Lifetime ISA if you are terminally ill, when you want to purchase your first home, and when you reach age 60.

Does the flexible ISA add any value?

According to HMRC data, the flexible ISA could be worth an extra £3 billion to UK savers over the next five years. Flexibility often has the opposite impact that many would expect. If we believe that we can access our money without damaging our tax savings, we are more likely to use it in the first place. Owning a flexible ISA is a fantastic way of helping to close the savings gap, which is why the Government introduced it.

Not all ISA providers offer the flexible ISA option

While the government has introduced the flexible ISA, it is up to the provider whether or not they make this possible. The consumer group Which, recently criticised ISA providers for refusing to offer this flexibility.

As stated earlier, a common misconception is that the flexible ISA only applies to cash ISAs. However, stocks and shares ISA can also be flexible, but you first need to sell your assets to withdraw from your stocks and shares ISA. Unfortunately, several stocks and shares ISA providers don’t offer this flexibility.

Also, some flexible ISA providers may charge extra withdrawal fees, while others limit how much money you can withdraw each month. These limits and fees can be seen as unfair practices, as individuals shouldn’t be penalised for taking their money out when needed. So, you may want to change providers if you want to find the best flexible ISA that comes without unnecessary fees.

What happens if I transfer my flexible ISA

The Flexible ISA rules currently state that to transfer money already paid into a flexible ISA in the current tax year, you are required to move the total amount. However, in the Autumn 2023 budget, it was announced that partial transfers of money deposited in the current tax year would be permitted from April 2024, and this applies whether we are talking about a flexible ISA or a non-flexible ISA.

Given the new flexibility rules, if you transfer your ISA from April 2024, you should check with your new provider to see if they comply, as some providers do not offer the flexible ISA option.

Suppose your new provider does not offer ISA flexibility. In that case, you might lose the ability to withdraw funds from your ISA because it will become a non-flexible ISA. However, if the transfer is between flexible ISA providers and you did not replace withdrawn funds at the time of the transfer, any repayment of funds that were withdrawn under the flexible ISA rules becomes impossible. Any repayment into your ISA account will count towards your remaining annual ISA allowance.

Moneyfarm offers the flexible ISA option

We introduced our flexible ISA option earlier last year in accordance with the flexible ISA rules HMRC issue. Many of our investors see their ISAs as a way to grow their money over the next few years, so they haven’t actually withdrawn from their ISAs, but we felt it was important to go through the process to be able to offer this. In our view, customers should never be charged or penalised for accessing their money, which is why we elected to add ISAs that operate under flexible ISA transfer rules.


What is a flexible stocks and shares ISA?

Currently, a flexible stocks and shares ISA is an investment account that allows you to withdraw money from your ISA and repay it within the same tax year without affecting your annual ISA allowance. Starting in April 2024, this will become standard across all ISAs, not just the flexible ISA.

Can I transfer a flexible ISA?

Yes, you can transfer a flexible ISA. However, if you transfer a flexible ISA to a provider that does not offer such flexibility, your ISA will lose its flexible status. Any repayment of money withdrawn before an account transfer will count towards your annual ISA allowance.

Is a Flexible ISA worth it?

Currently, the flexible ISA option is worth it to people who want access to their money while it is tax-protected. It also offers better interest rates than regular savings accounts and encourages long-term investment behaviour. Unexpected circumstances can also make this flexibility attractive to certain investors. But from April 2024, the new transfer amount rules should apply to all types of ISAs.

Did you find this content interesting?

You already voted!

*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.