How ISAs Work
There’s not much of our money that we can hide away from the prying eyes of the taxman, but an ISA is one way of doing it.
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.
There are set limits as to how much money you can put into an ISA — more on these in a minute. These limits apply to each tax year, which runs from 6 April to 5 April the following year.
It’s worth noting that the rules for ISAs have been changed a number of times since they were first introduced. Some of the changes have made them a little simpler to understand (hurrah!) while others had added a little complication (boo!). And since governments love to tinker with such things, there’s no doubt we’ll see more rule changes in future.
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.
- 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.
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.
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. You can even 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
Like adult ISAs, there are both cash and stocks & shares versions. 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.
New in December 2015: 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 will be 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 will boost your savings by 25% when you use the funds to buy your first property. The bonus size will be a minimum of £400 (meaning you will 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), and it will be available 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 will be 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.
Coming in April 2016: P2P ISAs
Another type of ISA, dubbed the Innovative Finance ISA, is set to be introduced from 6 April 2016 for the 2016/2017 tax year. It will allow people to shelter peer-to-peer (P2P) loans within an ISA so any interest received is free of tax.
The precise rules are still being formulated, but it is expected that the annual subscription limit will be the same as for Share and Cash ISAs.
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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