Individual Savings Accounts (ISAs)
Individual Savings Accounts (ISAs) are not difficult to get your head around. But having the knowledge of how to leverage them will be useful, at different times in your life. Here we help you understand them in sufficient detail!
What are ISAs?
Individual savings accounts (ISAs) are tax-favoured funds in which a taxpayer can hold a range of different investments. They are most commonly known for their tax benefits, which are provided to taxpayers.
Some of these benefits include:
- No tax on income (i.e. interest, dividends) from an ISA;
- There is no tax on Capital Gains arising on the disposal of an ISA;
- There is no minimum "lock-in" period; and
- Withdrawals can be made at any time.
What are the requirements to open an ISA?
You must be:
- 16 or over for a Cash ISA;
- 18 or over for a Stocks and Shares ISA or an Innovative Finance ISA; or
- 18 or over but under 40 for a Lifetime ISA.
You must also be either:
- A resident in the UK (see our Residency articles for more information); or
- A Crown servant (for example, diplomatic or overseas civil service) or the spouse or civil partner of a Crown servant, if you do not live in the UK.
It is important to note that you cannot hold an ISA with or on behalf of someone else.
What are the different types of ISAs available to me?
There are five main ISA investments which are most commonly offered:
- A Cash ISA, which is essentially a tax-free savings account;
- A Stocks and Shares ISA, which holds a variety of investments such as shares, unit trusts and bonds;
- An Innovative Finance ISA, which holds peer-to-peer loans. These are loans that you give to other people without using a bank or "crowdfunding debentures", which are investments in a business by buying its debt;
- A Lifetime ISA, which is used to save for buying a first home or for retirement. For further information, do let us know as Lifetime ISAs are typically the most complex type of ISAs;
- A Help to Buy ISA, which was type of Cash ISA which helped first-time buyers to save for a deposit on a home in the UK. They were available to open until 30 November 2019.
A Junior ISA is also available for individuals under 18 years of age.
How much can you invest in an ISA for the tax year?
In the tax year of 2021/2022 an individual can invest up to £20,000 into an ISA. The investment can be split between a Cash ISA, a Stocks and Shares ISA, and an Innovative Finance ISA in any combination the investor chooses (although it is only possible to subscribe to one of each type of ISA in a tax year).
A married couple or partners in a civil partnership can therefore invest up to £40,000 per annum into ISAs and any income here is tax-free.
There are a couple of points for the taxpayer which are not always conveyed and included in small print:
- Investors aged between 16 and 18 can only have a Cash ISA (with a £20,000 annual investment limit);
- The maximum that can be invested in a Lifetime ISA is £4,000 per annum. This counts towards the overall £20,000 limit; and
- There is no minimum investment period, so withdrawals from an ISA other than a Lifetime ISA can be made at any time without penalty.
How can money be withdrawn from an ISA?
Generally, if an individual invests in an ISA and then subsequently withdraws funds, the reinvestment that is permitted is restricted to the amount of unused ISA allowance in the tax year.
So if you were to invest £20,000 in an ISA in April 2021, you cannot withdraw any funds and then subsequently reinvest them in an ISA in 2021/22 as they have already invested the maximum amount in April 2021. They would have to wait until 2022/23 (6th April 2022) to reinvest the funds in the ISA.
Where an individual has a flexible ISA, they can withdraw funds and then replace them without the replacement counting towards the annual ISA allowance, provided the replacement funds are deposited before the end of the tax year in which the withdrawal is made. A withdrawal is deemed to be from current year investments in priority to the previous years’. Replacement funds are deemed to replace the withdrawal of previous years’ subscriptions in priority to current year withdrawals.
Real life scenario
Let's say your allowance is £20,000 and you put £10,000 into an ISA during the 2021/2022 tax year.
You then withdraw £3,000.
The amount you can now put in during the same tax year is:
- £13,000 if your ISA is flexible (the remaining allowance of £10,000 plus the £3,000 you took out); or
- £10,000 if your ISA is not flexible (just the remaining allowance).
What happens if you work abroad?
If you open an ISA in the UK then move abroad, you cannot put money into it after the tax year that you move. (This is the case unless you are a Crown servant working overseas or the spouse or civil partner of a Crown servant).
This is because you will stop being a UK Resident. We would advise if you think you will stop becoming a UK Resident to inform your ISA provider.
However, you can keep your ISA open and you’ll still get UK tax relief on money and investments held in it. You can transfer an ISA to another provider even if you are not resident in the UK. You can pay into your ISA again if you return and become a UK resident.
Note that ISA funds/income may be deemed taxable by the country you are moving to, so even though they are tax efficient here they may not be abroad. Reach out to us on firstname.lastname@example.org if you are looking to move abroad and we can ensure your move is planned efficiently.
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