What is an ISA?
An ISA is an Individual Savings Account available to UK residents, aged over 18 (16 for a Cash ISA or Help to Buy ISA), that enables you to save or invest money without paying income tax on the interest or dividends you receive and any profits from the investment are free of Capital Gains Tax.
Since they were introduced in 1999, ISAs have become one of the most popular ways to save. The current annual limit, or subscription limit, is £20,000 (2018/19 tax year). You may take out several different types of ISA in a tax year but the total invested cannot exceed the annual subscription limit. If you withdraw money from your ISA, you don’t reset your annual limit. However, if you have a Flexible ISA, the provider will offer the facility to withdraw and replace money from your ISA without using up more of your subscription limit provided it’s done within the same tax year. Please note not all ISA options and Providers provide this facility.
Today, there is a large range of ISA options from which to choose.
ISA options at a glance
|Type||Purpose||Allowance 2018 / 19||Tax Breaks|
|Cash ISA||All-purpose savings account||£20,000||Tax-free interest|
|Stocks and Shares ISA||Investment account||£20,000||Tax-free gains, no tax on dividends, tax-free interest|
|Lifetime ISAs||Investment accounts for first time buyers or retirement benefits under 40s; to use after 60 unless used earlier for first home purchase.||£4,000 + 25% (Government bonus)||Tax-free gains, no tax on dividends, tax-free interest|
|Help to Buy ISA||Savings account for first-time buyer’s deposit||£2,400 + 25% (Government bonus) Plus £1,000 initial deposit in month 1 which also qualifies for 25% Government Bonus||Tax-free interest|
|Junior ISA||Savings and investment accounts for under 18s who don’t hold a Child Trust Fund CTF (if CTF transferred to JISA can then contribute to JISA instead)||£4,260||Tax-free gains, no tax on dividends, tax-free interest|
|Innovative Finance ISA||Peer to peer lending account||£20,000||Tax-free interest on the loan|
Purpose: All-purpose savings account
Allowance (2018 / 19): £20,000
With a Cash ISA you’ll earn tax-free interest on your savings. You can only contribute to one Cash ISA per year but it is possible to transfer to another provider. A Cash ISA each year is capped at the overall ISA annual limit of £20,000 (2018 / 19 tax year).
A Cash ISA may suit you if you want to earn tax-free interest, you are a UK resident for tax purposes and you are aged 16 or over. This is a lower risk product, as your original savings are protected, but the money may not grow as quickly as inflation.
Many Cash ISAs are Instant Access accounts paying a variable interest rate which means you can access your money whenever you want to but the variable rate could impact on the returns you receive. Fixed Term Cash ISAs sign your money up for a set period or ‘term’, (usually between one and five years) and in return pay a higher interest rate. If you wish to access your money before the specified term, you may face a fixed fee penalty or an interest rate reduction.
It is possible these days for bank or building society interest to be received tax free outside of an ISA where the interest falls within the Personal Savings Allowance (£1,000pa for basic rate taxpayers and £500 for higher rate taxpayers; not available to additional rate taxpayers in the 2018/19 tax year).
Stocks and Shares ISAs
Allowance (2018 / 19): £20,000
Stocks and Shares ISAs offer the possibility of higher returns than Cash ISAs but carry additional charges and more risk. You should be comfortable with the fact that the value of your investments can go both up and down and that you might get back less than you invested and the level of risk will depend on the investments you choose to put in it.
They are tax-efficient investment accounts designed to help you participate in the performance of stock markets by allowing you to put money into a range of different investments, including unit trusts, investment trusts and government bonds. Essentially a ‘tax wrapper’ which can be put around a range of different investment products. Stocks and shares ISAs are usually considered to be longer term investments which you should plan to hold for a minimum of five years or more. But you can still get your money out earlier if your circumstances change.
You don't have to pay any Income Tax or Capital Gains Tax on the income or growth of the investments in a stocks and shares ISA, as long as you keep the investments within an ISA. But the tax advantages will depend on your personal tax position.
It is possible these days for income and/or gains to be received tax free outside of a Stocks & Shares ISA where the interest falls within the Personal Savings Allowance (£1,000pa for basic rate taxpayers and £500 for higher rate taxpayers; not available to additional rate taxpayers in the 2018/19 tax year). The Dividend Allowance provides tax free income on the first £2,000 (2018/19 tax year) of Dividend Income for all individuals. The Capital Gains Tax Annual Exemption is £11,700 (2018/19 tax year) for all individuals.
You can only pay into one Stocks and Shares ISA in each tax year, but you can open a new ISA with a different provider each year if you want to. You don’t have to use the same provider for your Cash ISA if you have one. You can pay your whole allowance of £20,000 (2018/19 tax year) into a Stocks and shares ISA, a Cash ISA, or a combination of these.
Investment accounts for first time buyers or retirement benefits under 40s; to use after 60 unless used earlier for first home purchase.
Allowance (2018 / 19): £4,000 + 25% (Government bonus)
The Lifetime ISA (LISA) is a tax-free wrapper that lets you put up to £4,000 (2018/19 tax year) in it every year. It is open to anyone between the ages of 18 and 40 and you can pay into it until you reach age 50. It can be as cash savings – so you get interest – or stocks and shares investing – so you get growth (or loss) and income. It's designed for two specific purposes. The first is for first-time buyers to use towards a deposit for a residential property, when buying a home for up to £450,000. You and your partner can combine your Lifetime ISAs if you both meet the eligibility criteria or if only one is eligible, use their Lifetime ISA. The second purpose is for retirement savings once you reach age 60. You can also access the money at any time if you are diagnosed with a terminal illness.
So if you decide to use the LISA to buy your first home, you can keep it open and save for retirement – and you’ll get a 25% bonus from the government paid monthly on everything you put in! For example, if you save £1,000, you'll have £1,250 and if you save the full £4,000, you'll have £5,000. And that's before interest or growth. The bonus is paid every month until you hit age 50 and counts as part of you LISA pot, so you'll get interest on it too (or investment growth/loss). Note that you only get the bonus on contributions, not interest or stocks and shares growth/loss. If you withdraw money for reasons other than for a first home purchase or retirement, you’ll have to pay a penalty of 25% of the amount withdrawn.
The amount you pay in uses up some of your annual ISA allowance of £20,000 (2018/19 tax year). You can open a Lifetime ISA, a Cash ISA, a Stocks and Shares ISA and an Innovative Finance ISA in each tax year.
If you die, any Lifetime ISA money, including interest and bonuses, is passed on to your beneficiaries without penalty, for example, people in your will. But it will lose the ISA tax wrapper and will form part of the estate for inheritance tax purposes.
Help to Buy ISA
Savings account for first-time buyer’s deposit
Allowance (2018 / 19):
£2,400 + 25% (Government bonus) Plus £1,000 initial deposit in month 1 which also qualifies for 25% Government Bonus
A Help to Buy ISA, introduced in Autumn 2015, is a government scheme designed to help you save for a mortgage to buy a home. It is a type of Cash ISA, so you cannot contribute to both a Help to Buy ISA and a Cash ISA in the same tax year (without carrying out a transfer first).
To qualify you must be 16 or over and be classified as a first-time buyer and not own a property anywhere in the world. Savings are tax free just like with a Cash ISA product but with the added bonus that the state will add 25% to your savings, up to a maximum of £3,000 on savings of £12,000. The Minimum amount that you need to save to qualify for a government bonus is £1,600, providing a £400 bonus. You can start off with an initial deposit of £1,000, but are limited to saving a maximum of £200 per calendar month (which can’t be made up in a later month if a month is missed) (2018/19 tax year). Help to Buy ISAs are available to each first-time buyer, not each home. So, if you’re buying a property with your partner, for example, you’ll be able to get up to £6,000 towards your mortgage. The bonus cannot be used for the initial exchange deposit, as was originally suggested in 2015 by the then Chancellor, George Osborne, and can only be spent as part of the final completion monies.
To qualify for a Help to Buy ISA, you’ll need to be a first-time buyer, aged 16 or over. The property you intend to buy must cost up to £250,000 (or up to £450,000 in London).
You’ll be able to open a Help to Buy ISA until 30 November 2019. After that date they won’t be available to new savers anymore – but if you opened your Help to Buy ISA before then you can keep saving into your account until 30 November 2029 when accounts will close to additional contributions.
You must claim your bonus by 1 December 2030.
Savings and investment accounts for under 18s who don’t hold a Child Trust Fund CTF (if CTF transferred to JISA can then contribute to JISA instead)
Allowance (2018 / 19):£4,260
A Junior ISA is a tax-free savings or investment wrapper aimed at encouraging families to save for their children's futures. You can open a Junior ISA on behalf of your child if they are under 18 and live in the UK and they don’t already hold a Child Trust Fund (CTF) – a child with a CTF can open a JISA if their CTF fund is first transferred to a JISA. Up to £4,260 can be invested in the current tax year (2018/19). Any money you put in belongs to the child but they cannot withdraw it until they turn 18, when the account is automatically turned into an adult ISA. They can however start to manage their own account from age 16.
You can put up to £4,260 into a junior ISA in the 2018/19 tax year which can be split whichever way you like between the two types of junior ISAs:
Junior Cash ISAs
This is a simple, tax-free savings account. This is a lower risk product, as the original savings are protected, but the money may not grow as quickly as inflation. Neither you or your child has to pay tax on the interest earned on their savings.
Junior Stocks & Shares ISAs
Here, as with the adult Stocks & Shares ISA, the Junior version offers the possibility of higher returns than the Junior Cash ISAs but carries more risk. Returns depend on the performance of the stocks or shares you've invested in and the value of a Junior Stocks & Shares ISA can go down as well as up. Any profits earned by trading shares or bonds are free from tax.
From April 2015 anyone with money in a Child Trust Fund can transfer it to a Junior ISA.
16 and 17-year-olds can also contribute into an adult Cash ISA (not an adult Stocks and shares ISA), up to the £20,000 limit (2018/19). This is in addition to any money paid into their Junior ISA.
Innovative Finance ISA
Purpose: Peer to peer lending account
Allowance (2018 / 19): £20,000
Innovative finance ISAs (IFISAs) contain peer-to-peer loans instead of cash (as in a cash ISA) or stocks and shares (as in a stocks and shares ISA). Peer-to-peer lending matches up investors, who are willing to lend, with borrowers, who could be individuals, businesses, or property developers. The interest rate rewards can be higher than a Stocks and Shares ISA but the risks are much greater.
You can only contribute to one innovative finance ISA with one single provider each tax year. Transfers may be possible depending on the plan terms and conditions.
Additional Permitted Subscription
Rules introduced in April 2015 mean that if your spouse or civil partner died on or after 3 December 2014, you’ll receive an additional one-off ISA allowance equal to the value of their ISA savings at the time of their death. This allowance is called an Additional Permitted Subscription (APS).
Safety of a Cash ISA
Cash you put into authorised UK banks or building societies is protected by the Financial Services Compensation Scheme (FSCS). Up to £85,000 (2018/19) per person in any one authorised firm is safe even if the firm collapses. Cash you put into UK banks or building societies (that are authorised by the Prudential Regulation Authority) is protected by the Financial Services Compensation Scheme (FSCS).
The FSCS savings protection limit is £85,000 (or £170,000 for joint accounts) per authorised firm. It is worth noting that some banking brands are part of the same authorised firm. If you have more than the limit within the same bank or authorised firm, it’s a good idea to move the excess to make sure your money is protected.
Please note that this information is not fully inclusive and is intended to provide general information only. It does not constitute personal advice. We recommend you talk to your Brunsdon Financial Adviser for further information and qualified advice. Any reference to tax treatment or legislation is based on our understanding of current UK legislation (September 2018), tax law and HM Revenue & Customs practice, all of which may be subject to change. The value of investments can go down as well as up and past performance is not necessarily a guide to future performance.