ISA Basics

ISA stands for Individual Savings Account and it’s simply a special type of savings and investment account which is (more or less) immune from tax.

Think of an ISA as being like a shark cage, with your money floating around inside it completely protected from any encircling tax sharks. So an ISA isn’t actually an investment itself, but more of a protective wrapper into which you can put your money.

As long as your money remains in the ISA, then you do not have to pay any tax on it. Once you withdraw it, or if you close the account entirely, then it becomes taxable again. In other words, you want to keep your money inside the shark cage for as long as possible!

This last point is particularly important if you want to move your ISA from one provider to another (to get a higher rate of interest perhaps). Do not close your original ISA account because, if you do, your money will lose its tax protection. Instead you need to transfer your ISA from one provider to the other. The provider to which you want to transfer will be able to provide information about how to do this. It may take a little while to process any transfer, but don’t let this put you off if you’re going to get a much better deal.

There are set limits as to how much money you can put into an ISA — more on these annual ISA allowances in a minute. These apply to each tax year, which runs from 6th April to 5th April the following year.

Index trackers and FTSE 100 share pricesIt’s worth noting that the rules for ISAs have been changed a number of times since they were first introduced in 1999. Some of the changes have made them a little simpler to understand and to use, while others have been well meaning but rather complicated. And since governments love to tinker with tax incentives, there’s no doubt we’ll see many more ISA rule changes in future.

Here’s a rundown of the different types of ISA you can get:

Stocks & Shares ISA

They are a few different types of ISA. The first is a Stocks & Shares ISA. Everyone aged 18 and above can put up to £15,240 into a Stocks & Shares ISA for the 2015/16 and 2016/17 tax years, rising to £20,000 in 2017/18.

Find out how you can get a Stocks & Shares ISA using The Motley Fool Share Dealing service. Motley Fool Share Dealing is an execution-only service and does not give investment advice. Of course, investing is not without risk: share prices go down as well as up and you may get back less than you invest.

Cash ISA

The second type of ISA is a Cash ISA. Unlike Stocks & Shares ISAs, the minimum age limit for cash ISAs is 16. You can put up to £15,240 into a cash ISA for the 2015/16 and 2016/17 tax years, rising to £20,000 in 2017/18.

Mixing share and cash ISAs

If you like, you can open both a cash ISA and a Stocks & Shares ISA in the same tax year. However, the total amount you put in cannot exceed £15,240.

So you could invest £7,620 into each, or you could invest £5,000 in a cash ISA and £10,240 in a Stocks & Shares ISA, or you can have the whole £15,240 in a cash ISA if you like.

You can have both types of ISAs with the same provider, or you can have them with two separate companies. Most ISA providers will also let you combine cash ISAs from previous years into one big cash ISA. The same applies to Stocks & Shares ISAs.

A relatively recent rule change, and one of the more useful, is that you can convert an existing cash ISA into a Stocks & Shares ISA, and vice versa.

One thing that can cause a little confusion is how the annual contribution limits for ISAs work. The limits apply to all the money you put in during a tax year. So, for example, you can’t put your full allowance into a Stocks & Shares ISA in May, withdraw £2,000 in August and then put it back again in October. In this instance, you used up all of your ISA limit with your initial contribution in May. However, this restriction will change from 6 April 2016. From this date, you will be allowed to withdraw and replace money from your cash ISA during a tax year without the replacement money counting towards your annual ISA subscription limit. This will also apply to cash held in stocks and shares ISAs.

Junior ISAs (JISAs)

Children can have a Junior ISA if they are under 18, live in the UK, and don’t already have a Child Trust Fund (a similar tax-free scheme for children born between 2002 and 2011). However, if your child does have a Child Trust Fund you can transfer what’s in to a Junior ISA.

Like mainstream adult ISAs, there are both cash and stocks & shares versions of Junior ISAs. If you are a parent or guardian you can open and manage the account, but the money belongs to your child.

Your child can take control of the account when they’re 16. What happens when they turn 18 puts some people off, however. At this time, the Junior ISA is automatically converted to an adult ISA, so the tax benefits can continue. But your child can also withdraw as much as they want!

The subscription limit for Junior ISAs is £4,080 for the 2015/16 and 2016/17 tax years.

One final thing worth noting is that from age 16, you can also open an adult cash ISA, so for a couple of years your child effectively gets two sets of ISA allowances.

Help To Buy ISAs

Help To Buy ISAs will be available for four years from 1 December 2015 to 30 November 2019. They allow anyone who is 16 and over and who has never owned a home before (either in the UK or abroad) to save up to £200 a month, plus make an initial deposit of up to £1,200.  

Help To Buy ISAs are limited to one per person, so a couple can have two separate Help To Buy ISAs (provided neither of them has owned a home before).

The key attraction is that the government boosts your savings by 25% when you use the funds to buy your first property. The bonus size is a minimum of £400 (meaning you need to save at least £1,600 to qualify) and a maximum of £3,000 (so no bonus is paid on any amount saved over £12,000).

Help To Buy ISAs can be used for home purchases of up to £250,000 (or up to £450,000 in London). When you buy your first home, your Help To Buy ISA provider can supply you with a closing letter which the solicitor handling your home purchase will then use to apply for the bonus on your behalf. The maximum a solicitor can charge for this aspect of the transaction has been set at £50 plus VAT.

Once a Help To Buy ISA account has been opened, there is no limit on how long you can save into it, or to get the government bonus when you buy a property (assuming you qualify for it of course).

Generally speaking you can’t open both a Cash ISA and a Help To Buy ISA in the same tax year. However, there is a useful FAQ with more information about this and other detailed points on how this product works on the Help To Buy website. There is also a new type of ISA coming in April 2017, called the Lifetime ISA, which offers similar benefits but allows you to save more (more on this below).

Launched in April 2016: Innovative Finance ISAs

The Innovative Finance ISA was introduced on 6 April 2016. It allows  investors aged 18 or over to shelter peer-to-peer (P2P) loans within an ISA.

In the 2016/17 tax year you can subscribe up to £15,240 in cash, which can then be used to make loans via P2P platforms. Any loan repayments, interest and gains from peer to peer loans are eligible to be held within the ISA, without being subject to tax.

It’s worth remembering that although P2P platforms are now regulated by the Financial Conduct Authority, unlike cash ISAs they are not covered by the Financial Services Compensation Scheme

Coming in April 2017: Lifetime ISAs

The 2016 Budget introduced (yet) another different type of ISA, the Lifetime ISA. It builds on the idea of the Help to Buy ISA, but it should be more flexible and have higher conrtibution limits.

From April 2017, anyone between 18 and 40 years of age will be able to open a Lifetime ISA account. You will be able to save up to £4,000 each year until your 50th birthday,  and receive a 25% bonus from the government. Any money in this account can be saved until you are over 60 and then taken out free of tax, or it can be used to buy your first home.

We have a separate article with more details on how Lifetime ISAs work.

Let’s round off this guide by answering a couple of common questions:

What happens if you move abroad?

Generally speaking, you can only put money into an ISA if you’re a UK resident. So if you go abroad, you can’t put any more money into an ISA. You can keep any existing ISAs that you have though.

What happens if you die?

It used to be the case that the tax advantages of ISAs finished when you passed away, but this was changed in the 2014 Autumn Statement.

From 3 December 2014 onwards, if an ISA saver in a marriage or civil partnership dies, their spouse or civil partner will inherit their ISA tax advantages.

What’s more, from 6 April 2015 onwards, the surviving spouse will be able to invest as much into their own ISA as their spouse used to have, on top of their usual allowance. This means they can preserve the tax-free status of any savings or investments their spouse held in ISAs.

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