Individual Savings Accounts (ISAs) allow UK-residents to save tax-free.
They are a type of ‘tax wrapper’, i.e. no tax will be paid on any investment placed within an ISA. No tax is paid on the interest, income or capital gains received from ISA investments.
Every tax year (6th April to next 5th April) you can place investments, up to a certain value, into your ISAs. Currently that limit is £20,000. So long as you are within the limit you do not need to tell HMRC about it. As long as you keep your investments within the ISA, your investments (and interest, income and capital gains) will continue to be tax free, beyond the current tax year.
There are four types of ISAs you can open (see below for more details):
Stocks and Shares ISA
Innovative Finance ISA
If you hold multiple ISAs then the £20,000 limit can be split between the different ISAs, as long as the total does not exceed £20,000.
For Example: You could place £3,000 in your Cash ISA, £13,000 in your Stocks & Shares ISA and £3,000 in your Innovative Finance ISA.
You can also have multiple ISAs of the same type, but importantly you can only open one ISA of each type in a single financial year
For Example: If you opened an Innovative Finance ISA in a previous tax year, and you opened a Cash ISA and a Stocks & Shares ISA in the current tax year, then you may still open an Innovative Finance ISA in the current tax year, but not an additional Cash ISA or Stocks & Shares ISA.
Cash ISAs operate like savings accounts with banks and building societies. There are many different types, with different terms and conditions. The two main types of Cash ISA are instant access, where you can quickly access the money if needs be, and fixed ISAs, which usually offer a higher rate of interest but prevent you accessing your money for a set period of time, e.g. 1 year.
Stocks and Shares ISAs
This type of ISA allows you to invest in stocks & shares, investment funds, government debt and corporate debt. These ISAs can either be passive, whereby you deposit money and the ISA provider will invest on your behalf, or you can actively choose where your investments are placed (known as ‘DIY investing’). See our Online Investment Platforms Guides for more information.
The UK Government created Lifetime ISAs as a way of incentivising UK residents to save for either a first home or retirement. You must be between 18 and 40 years old to open a Lifetime ISA. Stocks & Shares ISAs or Cash ISAs can be placed within a Lifetime ISA scheme and they will earn interest or capital growth, as per normal. The government will then contribute a 25% bonus on the savings or investments held in a Lifetime ISA each year. The Lifetime ISA limit is £4,000 per year (not £20,000) and this amount still contributes to your total ISA savings allowance.
For example: If you put £4,000 into a Lifetime ISA then you can still invest £16,000 in other ISA savings products (Stocks & Shares, Cash, IFISA)
Importantly, the government will only give you the 25% bonus if you withdraw the money for the purposes of buying your first home or retirement (Note: you have to be older than 60 to withdraw your investment for retirement). If you choose to withdraw money from a Lifetime ISA for reasons other than those above, you will incur a 25% charge on the amount you would like to withdraw. This could mean you get back less money than you put in originally (if you withdraw all the money available).
For example: If you have invested £1,000 in the Lifetime ISA and gained the government top-up of 25% then after one year you will have £1,250 of savings/investments (plus the relevant interest, not included in this example). If you choose to withdraw the money for a purpose other than a first home or retirement then you will incur a 25% charge on the total: £312.50. Therefore the amount withdrawn is £913.50, which is less than your original investment.
Innovative Finance ISAs
Innovative Finance ISAs (IFISAs) allow investors to lend directly to businesses whilst enjoying the same tax benefits as other ISAs. This is known as peer-2-peer lending (p2p). IFISA eligible products are offered through online investment platforms. Different platforms generally specialise in different sectors, for example green bonds, property, business loans. IFISAs were introduced in April 2016 by the UK Government. See our IFISA Guide for more details.
Things to Consider Further
Beware of the rules around withdrawing money, transferring ISAs between providers, moving abroad, and inheritance tax implications. For more details, see: https://www.gov.uk/individual-savings-accounts
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