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Individual Savings Accounts (ISAs)
ISAs remain one of the most tax efficient solutions for your savings. On 1 July 2014, several restrictions were removed to improve flexibility and transfer options.
Under the so-called New ISA, the contribution limit for Cash ISAs and Stocks and Shares ISAs has effectively been merged, with the overall limit increased to £20,000. This can be invested in either Cash, Stocks and Shares, Lifetime or Innovative Finance ISAs, or a mixture of types.
You'll also be able to transfer new and previous years' ISA investments from Stocks and Shares into Cash, and vice versa, as opposed to previous rules which didn’t allow stocks and shares ISAs to be transferred into Cash ISAs.
From Autumn 2015 individuals may be able to withdraw money from ISAs and replace it in the same tax year without the replacement counting towards their annual ISA subscription limit for that year. This only applies if the ISA has adopted the Flexible ISA rules. Please check with your provider.
What is an ISA?
Available since April 1999, ISAs offer an attractive tax-efficient investment to anyone aged 18 or over (16 or over for cash ISAs).
Tax must be paid on the income and profits made from investments in the stock market, either directly or through unit trusts and OEICs.
ISAs, however, serve as a kind of 'wrapper' to protect savings from tax. This allows individuals to invest in a range of tax efficient savings and investments, and pay no personal tax at all on the income and/or profits received.
The Government has said that the ISA will be available indefinitely.
A Lifetime ISA provides a 25% bonus payment on top of individual contributions. However, limits apply and the Lifetime ISA has to be opened between the ages of 18 and 39 and, in order to benefit from the 25% bonus, money must be held in the ISA until the individual is aged 60. An exception is made if the money is being withdrawn to purchase a first home, in which case the bonus is available regardless. The Lifetime ISA annual allowance is £4,000 and it can be held alongside other ISAs, but it forms part of the £20,000 overall individual allowance.
You will incur a lifetime ISA government withdrawal charge (currently 25%) if you transfer the funds to a different ISA or withdraw the funds before age 60 and you may therefore get back less than you paid into a lifetime ISA.
By saving in a lifetime ISA instead of enrolling in, or contributing to an auto-enrolment pension scheme, occupational pension scheme, or personal pension scheme:
- you may lose the benefit of contributions from your employer (if any) to that scheme; and
- your current and future entitlement to means tested benefits (if any) may be affected.
Innovative Finance ISA
Investing in an Innovative Finance ISA potentially offers higher returns. However, it operates in a similar fashion to crowdfunding so as a result, the risks to capital may also be very high. Investments in these ISAs count towards the overall £20,000 ISA allowance. You should seek financial advice before considering this form of ISA.
The main benefits of an ISA
No personal tax (income or capital gains) on any investments in an ISA.
Income and gains from ISAs do not need to be included in tax returns.
Money can be withdrawn from an ISA at any time without losing the tax breaks.
Tax treatment varies according to individual circumstances and is subject to change.
How ISAs work
There are several types of ISA, which may contain one or more of the following components:
Stocks and shares, in the form of either individual shares or bonds, or pooled investments such as open-ended investment funds, investment trusts or life assurance investments.
Cash, usually containing a bank or building society savings account.
Peer to peer loans (Innovative Finance ISA)
Junior ISAs are now also available as both stocks and shares Junior ISAs and cash Junior ISAs, the current contribution limit for these is £9,000 per annum (2022/23) with no change from 2021/22. Your child can have a Junior ISA if they:
- are under 18
- live in the UK
- weren’t entitled to a Child Trust Fund (CTF) account (or if they transfer their CTF funds to a JISA and close their CTF first)
The tax efficiency of ISAs is based on current rules. The value of your investment can go down as well as up and you may get back less than you invested. Tax concessions are not guaranteed and may change. The benefit of the tax treatment depends on the individual circumstances.
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