ISA stands for Individual Savings Account and it’s simply a special type of savings and investment account designed to protect your money from being taxed.
Think of an ISA as being like a shark cage, with your money floating around inside it completely protected from any encircling tax sharks. 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 your ISA account, then it becomes taxable again. In other words, you want to keep your money inside the shark cage for as long as possible!
You can usually move your ISA from one provider to another whenever you want (for example, you might want to get a higher rate of interest). Do not close your original ISA account when you do this, though. If you do, your money will lose its tax protection.
Instead you need to transfer your ISA from one provider to the other. Your new provider will be able to do this for you. It may take a little while to process any ISA transfer, but don’t let this put you off if you’re going to get a much better deal.
However, it’s worth checking to see if your ISA provider levies a charge for moving to another company. Most commonly this will be an interest penalty if you decide to move a fixed-rate savings account before it’s due to mature.
There are set limits as to how much money you can put into an ISA. These apply to each tax year, which runs from 6th April to 5th April the following year.
Who can get an ISA?
Generally speaking, any UK resident aged 18 and over can open an ISA but the age requirements do vary a bit depending on the type of ISA you want to open — more on those in a minute.
Those under the age of 18 can open a similar product called a Junior ISA.
What is an ISA good for?
ISAs have become a lot more versatile and flexible over the years.
The amount you can put into an ISA each year and what you can invest in has greatly increased so many people now use them alongside or even instead of a pension when it comes to funding their retirement plans.
Here’s a rundown of the different types of ISA you can get:
What is a Cash ISA?
The simplest type of ISA is a cash ISA. Any UK resident aged 16 or over can open one of these.
You can currently put in up to £20,000 into a cash ISA each tax year and pay no tax on any interest you receive.
It’s worth noting that changes to the way interest on savings accounts are taxed in recent years have made the tax protection less valuable, particularly for smaller sums.
What is a Stocks and Shares ISA?
Stocks and Shares ISAs protect your money from income tax on dividends received and capital gains tax on any profits you make.
You can put up to £20,000 into a Stocks and Shares ISA each tax year.
Once you put the money into a Stocks and Shares ISA, you can use it to buy shares, investment funds, corporate bonds (loans to companies), and government bonds (loans to governments).
What is an Innovative Finance ISA?
Innovative Finance ISAs are a relatively new idea and they are yet to catch on in a significant way. They allow you to make peer-to-peer loans, i.e. lending directly to people or companies.
You can out up to £20,000 into an Innovative Finance ISA each tax year.
What is a Lifetime ISA?
Lifetime ISAs are another recent addition. To open one, you have to be a UK resident aged between 18 or over but under 40.
You can put up to £4,000 into a Lifetime ISA each tax year. Usefully, once you have already opened one, you can carry on adding £4,000 each tax year until you are 50.
You can put the money into cash or stocks and shares.
Most attractively, the government adds a 25% bonus to any money you put in.
The catch is that you can only withdraw money from a Lifetime ISA to buy your first home or once you turn 60. If you withdraw it in any other circumstances, you lose all the government bonus plus a little bit extra on top.
Can you have more than one type of ISA?
Yes, you can. The key thing to focus on is the annual allowances governing what you can put into ISAs each tax year.
The maximum is £20,000, so you could put £10,000 into a cash ISA and £10,000 into a Stocks and Shares ISA.
Remember there is a slightly lower limit for Lifetime ISAs, so another combination might be £8,000 into a cash ISA, £8,000 into a Stocks and Shares ISA, and £4,000 into a Lifetime ISA.
Another restriction is that you can only put new money into one of each of the four types of ISA each tax year.
This means you can’t put money into two separate cash ISAs in the same tax year, but you are able to have multiple cash ISAs with different providers that you have built up from previous years.
Finally, it’s worth noting that you are allowed to withdraw and replace money from your ISA during a tax year without the replacement money counting towards your annual ISA subscription limit. This also applies to cash held in stocks and shares ISAs.
Therefore, you can put in £20,000, withdraw £5,000 and then put the £5,000 back in again — as long as this is all done within the same tax year.
What happens if you move abroad?
Generally speaking, you can only put new money into an ISA if you’re a UK resident for tax purposes. However, you can keep any existing ISAs that you have.
What happens if you die?
Any ISAs you hold form part of your estate and might become liable for inheritance tax.
However, when you die your spouse or civil partner can inherit your ISA allowance. What’s more, they can add a tax-free amount up to the value of your ISA when you died or when the ISA was closed as part of the process of administering your estate. Your ISA will close.
Can I have a Stocks and Shares ISA and a Lifetime ISA?
Yes, you can have both and you can put money into both in the same tax year. You can put up to £4,000 into a Lifetime ISA and the remainder of your £20,000 total ISA allowance (so £16,000 if you put £4,000 into a Lifetime ISA) into a Stocks & Shares ISA.
Can I pay into two different ISAs in the same year?
Yes, you can put money into one of each of the four types of ISA each tax year. The four types are Cash ISA, Stocks & Shares ISA, Innovative Finance ISA, and Lifetime ISA.
The total amount you put in cannot exceed £20,000 in a single tax year and there is a £4,000 annual limit for Lifetime ISAs.
Can I trade shares in an ISA?
Yes, you can trade shares either in a Stocks and Shares ISA or within some types of Lifetime ISA.
Is it worth getting a Stocks and Shares ISA?
It will depend on your own personal tax situation but most people who invest on a regular basis or in larger amounts (a few thousand pounds or more) can probably benefit from sheltering their investments within a Stocks and Shares ISA.
The biggest benefit is likely to be when it comes to selling your investments and using the proceeds, although that could be decades in the future.