10 things you need to know about Isas
1. Your money will grow tax-free
The key benefit is that any money you hold within an Isa can grow without incurring a tax bill.
That means that any interest you earn isn’t liable for income tax. Plus, if you put investments in an Isa any growth isn’t liable for capital gains tax and dividends (the income) paid on investments within an Isa are tax-free too.
2. You can deposit over £15,000 a year
There is a limit on how much you can put into Isas each tax year. At present it is £15,240 for the 2016/17 tax year but from 6 April it rises to a massive £20,000 for the 2017/18 tax year. That is a limit most of us will get nowhere close to – the average amount paid into an Isa in 2015/16 was £6,338, according to government statistics.
3. You can only pay into one cash Isa
Each tax year you can open one new cash Isa. If later that same year you see an Isa paying a better interest rate you can move to it, but you must close the original Isa and transfer all the money over to the new Isa.
In order to avoid falling foul of the rules ask the provider of the new Isa to transfer your old Isa over. Do not withdraw your money and then pay it into your new Isa, that counts as new Isa money and will count towards that year’s Isa allowance. So, if your balance is more than £20,000 in the 2017/18 tax year, you won’t be able to pay it all into the new Isa.
Those rules don’t apply to Isas opened in previous tax years. You can transfer part or all of that money into your new Isa without having to close the old account.
4. Kids can have their own Isas
Everyone is allowed to have an Isa, but children have different entitlements. Up to the age of 16 a child can have one cash Junior Isa and/or one investment Junior Isa.
Throughout that time they can only have one of each, so if you see a better rate for your child’s Junior Isa you will have to transfer the whole balance and close the old account.
Children can put a lot less into their Junior Isas than adult Isas. The limit for the current tax year is £4,080, rising to £4,128 from 6 April.
- For Junior Isa recommendations, check out Moneywise's Children's Savings Awards 2017.
5. Teenagers can have two Isas
Children who are 16 or 17 are allowed to have an adult cash Isa as well as a Junior Isa. That means this age group has a larger Isa allowance than anyone else.
6. Isa withdrawal rules have changed
The taxman has become a lot more flexible when it comes to withdrawing money from your Isa. In the past every time you deposited money into an Isa it counted towards your annual Isa allowance and withdrawals were irrelevant. So, if you invested £10,000 into an Isa tomorrow, then withdrew £5,000 tomorrow you would only be able to deposit another £5,240 into your Isa before you hit the limit.
That has all changed now. Your Isa allowance is the balance of the Isa you opened that tax year. So, if you open an account and deposit £20,000 then withdrew £5,000 later in the year you would be able to add £5,000 back into your Isa at a later date.
7. Peer-to-peer lending is allowed in an Isa
Last year a new Isa joined the family, the Innovative Finance Isa. This product is offered by peer-to-peer lenders and allows you to protect your peer-to-peer investments from the taxman.
Given that the interest rates available on peer-to-peer – where your money is lent directly to an individual or business in need of a loan – are far higher than those available on standard cash Isas this is great news for anyone prepared to take a little bit of extra risk with their cash.
The extra risk comes in because peer-to-peer investments are not covered by the Financial Services Compensation Scheme, even if they are held within an Innovative Finance Isa. This means if the peer-to-peer company goes bust you could lose your savings.
However, in order to offer IF Isas peer-to-peer lenders have to be fully authorised by the Financial Conduct Authority, it’s taking a while for the big names to get all the paperwork sorted so very few offer IF Isas as yet.
8. Isas offer free money for first-time buyers
If you are saving up for your first home then you should definitely use an Isa. You can open a Help to Buy Isa and save into it regularly, enjoying tax-free growth.
Plus, when it is time to buy a house the government will give you a cash bonus of 25% of the balance of your account. So, if you have £10,000 saved the government will add £2,500. The bonus is capped at £3,000.
You can put up to £3,400 into this kind of Isa in the first year (up to £1,200 opening balance then a maximum of £200 a month thereafter), then £2,400 each year after that.
But you only qualify for a Help to Buy Isa if you have never owned a property previously.
9. A new Isa is coming
From April 2017, there will also be another option for first time buyers in the form of the Lifetime Isa.
This works a little differently to other Isas as there are restrictions on when you can access the money, but in return, it comes with extra perks.
Only people aged 18 to 39 can open a Lifetime Isa, they can then deposit up to £4,000 a year and it will grow tax-free as with all other Isas. But, at the end of each year the government will add a 25% top up. So, if you save in the full £4,000 the government will add another £1,000. The bonus is paid every year until you turn 50, meaning there is a potential to pocket £32,000 in free cash.
However, if you want to access your Lifetime Isa savings before you are 60 you have to use it to buy your first home, otherwise you lose the government bonus and pay a penalty for withdrawing your cash. Otherwise, you can withdraw your money penalty-free after you turn 60.
Savers can hold a Lifetime Isa or a Help to Buy Isa, but crucially, you can’t claim the cash bonus on both so you’ll ultimately have to decide between them. The Lifetime Isa is a bit more flexible than the Help to Buy Isa, and allows investments as well as savings.
10. You can inherit an Isa
If your spouse or civil partner dies you can inherit their Isa savings and continue to enjoy tax-free growth on the contents.
In order to move the Isa into your name the surviving partner is given an ‘additional permitted subscription’ – or extra Isa allowance – that is equivalent to the value of their partner’s Isa balance at the time of their death.
So, if your partner dies with Isas worth £50,000 then you would have an Isa allowance of £70,000 for that year (from April 2017).
- This article is part of our A guide to stocks and shares Isas series.
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.