Important questions answered ahead of ISA season!

What is an ISA, anyway? And how do you choose the right type of ISA for your needs? Here are the answers to 10 frequently asked ISA questions.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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Maybe you’ve heard of ISAs, but do you know what they are and how to get one. According to Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, many people are still in the dark about how ISAs can help them. So, to help shed some light on how ISAs work, here are the answers to 10 frequently asked ISA questions. 

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1. What is an ISA, anyway?

ISA is short for Individual Savings Account. This means an ISA is simply a type of savings account. There are a few different types of ISAs:

Please note that tax treatment depends on the individual circumstances of each individual and may be subject to future change. The content of this article is provided for information purposes only. It is not intended to be, neither does is constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

2. How does an ISA work?

No matter what type of ISA you open, they all have one thing in common: you don’t pay tax on the money or investments you hold in them. For example, if you open a cash ISA, you won’t pay tax on your savings or interest. And if you have a stocks and shares ISA, you won’t pay tax on the stocks or shares inside. 

So, you can think of an ISA as a ‘tax wrapper’, protecting your savings and investments from taxation. 

3. How much can you save in an ISA?

Everyone has an ISA limit, which is a limit on how much you can save in ISAs during the tax year (6 April to 5 April).

Right now, the ISA allowance is £20,000 in a single tax year. 

4. Are ISAs transferable?

Yes. It’s possible to transfer between:

  • ISAs of the same type; and
  • Different types of ISA.  

There’s one caveat: don’t withdraw the money from one ISA to move it to another. Otherwise, the money will come out of your allowance and could be subject to tax. Instead, contact your provider to arrange an ISA transfer

5. Can you have more than one ISA?

Sure! That said, there are two key points to consider:

  • You can only open one of each type of ISA per tax year. That means you can’t open two stocks and shares ISAs in one tax year, and so on.
  • You can only pay into one of each type of ISA in a tax year. So you could pay into a cash ISA and a stocks and shares ISA, but you couldn’t pay into two cash ISAs in the same year.  

Over time, you could be running multiple ISAs. 

6. When should you open an ISA?

Whenever you’re ready! Here are some points to bear in mind, though: 

  • According to Hargreaves Lansdown, January and February are popular months for opening ISAs. Opening an ISA before the tax year ends gives you a chance to invest some money and take advantage of the ISA allowance before the new tax year begins.
  • If you open an ISA at the start of the tax year, there’s more time for the ISA to grow in value before the tax year ends.   

Weigh up the pros and cons, and open an ISA when it makes the most financial sense for you. 

7. Where should you invest your money?

Well, it depends on your personal goals, how much money you can afford to invest and your appetite for risk. Remember, there’s always risk involved when you invest money in a stocks and shares ISA, and there’s no guarantee you’ll get back what you put in.

If you’re ready to invest, you might check out our guide to share dealing

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8. Where does your ISA go when you die?

Good question! Here’s what happens:

  • If the ISA grows in value before probate is completed, this interest will still be tax free.
  • ISAs often pass to the surviving spouse after probate without affecting their annual allowance.
  • If the ISA goes to anyone other than the spouse, they may pay inheritance tax (IHT) on the amount. 

9. How much should you put into an ISA?

It depends on your budget. The ISA allowance may be £20,000 per tax year, but that doesn’t mean you can afford to save that much! It might be a good idea to make regular monthly deposits to build a savings habit, so review your finances and decide how much you can commit to your ISA. 

10. How do you choose an ISA?

Again, it’s all about your goals. For example, if you’re saving for a first home and you’re under 39, a Lifetime ISA might be worth exploring. Or if you’re keen to start investing, then you might look at longer-term options, like a stocks and shares ISA. 

And depending on your circumstances, you might decide against an ISA and opt for a different type of savings account entirely! Always explore your options before making any financial decisions. 

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