Individual Savings Accounts (ISAs)
Savers and investors have just under a month to use the £20,000 they can put into their tax-efficient Individual Savings Account (ISA) before the end of the financial year on 5 April. The current tax year started on 6 April 2021 and ends on 5 April 2022.
ISAs enable you to minimise the amount of tax you pay on your hard-earned cash. This is because there is no Income or Capital Gains Tax payable, which can make a significant difference over the long term. Some ISAs give you instant access to your money and can be used to plan your finances for the short term. On the other hand, if you have longer-term savings goals, you can invest in an ISA for your future.
Don’t lose your ISA allowance
There is a limit you can pay into ISAs each tax year and this is called your ISA ‘annual allowance’. For the 2021/22 tax year, your ISA annual allowance is £20,000 and you have until midnight on 5 April 2022 to use this allowance. If you don’t use your ISA allowance, you will lose it as it cannot be carried forward.
However, you will have a new annual ISA allowance available from 6 April 2022 in the 2022/23 tax year, so if you have already put £20,000 into an ISA in the 2021/22 tax year, you could put another £20,000 away on or after 6 April 2022. You can only pay into one of each type of ISA in a tax year, within the ISA annual allowance.
Different types of ISA:
- Cash ISAs
- Lifetime ISAs
- Junior ISAs
- Stocks & Shares ISAs
- Innovative Finance ISAs
We’ve answered some typical questions we get asked about how best to use the ISA allowance to help make the most of the various opportunities.
Q: What is a Cash ISA?
A: A Cash ISA is a savings account that allows you to make regular contributions. Unlike a standard savings account, you won’t pay any tax on the interest earned within your Cash ISA.
The main difference between a Cash ISA and a standard savings account is that there is a maximum amount you can pay each tax year into a Cash ISA. The total amount you can put into a Cash ISA for the 2021/2022 tax year is £20,000. This is known as the ISA allowance and is available to every person over 16 in the UK.
To be eligible for a Cash ISA, you must be aged 16 or over and a UK resident. The only exception to this is in the case of Lifetime ISAs, which require you to be 18 years old. The only time when a Cash ISA isn’t exempt from tax is if you are aged 16 or 17 years old, and the money in your account is a gift from a parent. If this is the case, your parents may have to pay tax if parental settlement rules apply.
Q: What is a Stocks & Shares ISA?
A: A Stocks & Shares ISA is a tax-efficient wrapper that can be put around a wide range of different investment products. Any investment growth or interest earned within the ISA product is free of tax.
If cash savings aren’t delivering the returns you want, it can be worth considering a Stocks & Shares ISA. Similarly, if you’d like to start investing in the stock market, this kind of ISA is a good first step.
To open a Stocks & Shares ISA you must be over 18 years old and be a UK tax resident. You pay no UK tax on income from dividends and protect any profit from Capital Gains Tax.
For the 2021/2022 tax year you can invest up to £20,000 in a Stocks & Shares ISA. You can also split that amount over different ISAs in a tax year, but not two of the same type. For example, you could invest £10,000 in a Stocks & Shares ISA and £10,000 in a Cash ISA in the same tax year.
When setting up a Stocks & Shares ISA, you can choose what investments to place inside the ’tax-efficient wrapper.’ This determines both the risk level and potential growth of the ISA. Shares held in a Stocks & Shares ISA can also benefit from dividends if the company chooses to pay them. This can further boost the ISA’s tax-efficient growth.
Your investment options, for example, can be invested into:
- Shares in companies
- Unit trusts and Open-Ended Investment Companies (OEICs)
- Investment trusts
- Corporate bonds
- Government bonds
- Exchange-traded funds
A Stocks & Shares ISA offers the potential for actively growing your money over time to beat inflation, while saving you tax at the same time.
Q: What are Junior ISAs?
A: Junior ISAs, or JISAs can be set up for any child from birth to the age of 18. They can be Cash ISAs or Stocks & Shares ISAs and are a tax-efficient way to save or invest for a child as they are free from any Income Tax, tax on dividends and Capital Gains Tax on the proceeds.
Those investing on behalf of a child, generally parents and grandparents, must be aged 16 or over and be a UK resident. The annual allowance for 2021/22 is £9,000.
Q: What is an Innovative Finance ISA?
A: An Innovative Finance ISA allows individuals to use some or all of their annual ISA allowance to lend funds through the Peer-to-Peer lending market.
They were introduced in 2016 to encourage retail investors to invest in lending over Peer-to-Peer lending and bond platforms. Investing in debt-based crowdfunding was then introduced from 1 November 2016.
Innovative Finance ISAs now sit alongside Cash, Stocks & Shares and Lifetime ISAs to give investors more diversity and choice over what to do with their ISA investments.
Peer-to-Peer lending allows individuals and companies to borrow money directly from lenders. Your capital and interest may be at risk in an Innovative Finance ISA and your investment is not covered under the Financial Services Compensation Scheme.
As with all ISAs, your annual allowance can’t be rolled over to the next tax year.
Q: What is a Lifetime ISA?
A: You can use a Lifetime ISA to buy your first home or save for later life. You must be 18 or over but under 40 to open a Lifetime ISA.
You can put in up to £4,000 each year until you’re 50. You must make your first payment into your ISA before you’re 40.
The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year. The Lifetime ISA limit of £4,000 counts towards your annual ISA limit. This is £20,000 for the tax year 2021/22.
When you turn 50, you will not be able to pay into your Lifetime ISA or earn the 25% bonus. Your account will stay open and your savings will still earn interest or investment returns.
You can take your savings out of a Lifetime ISA when you’re 60 or over.
To open and continue to pay into a Lifetime ISA, you must be a resident in the UK, unless you’re a crown servant (for example, in the diplomatic service), their spouse or civil partner.
Q: Can I have more than one ISA?
A: You have a total tax-efficient allowance of £20,000 for this tax year. This means that the sum of money you invest across all your ISAs this tax year (Cash ISA, Stocks & Shares ISA, Innovative Finance ISA, or any combination of the three) cannot exceed £20,000.
You can only pay into one Stocks & Shares ISA or Innovative Finance 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 have the flexibility to split your tax-free allowance across ISAs and ISA types. For example, you may invest £10,000 in a Stocks & Shares ISA and the remaining £10,000 in a Cash ISA. This is a useful option for those who want to use their investment for different purposes and over varying periods of time.
Q: Can I carry over any unused ISA allowance to another tax year?
A: The yearly ISA allowance expires at the end of the tax year and any unused allowance will be lost. It can’t be rolled over to the following tax year.
Q: Will my spouse receive my ISA proceeds in the event of my premature death?
A: Following ISA rules that were introduced in April 2015, a surviving partner of a spouse or registered civil partner who died on or after 3 December 2014 will receive an additional ISA allowance equal to the value of the deceased’s ISA savings at the time of death.
Q: Is tax payable on ISA dividend income?
A: No tax is payable on dividend income. You don’t pay tax on any dividends paid inside your ISA. Outside of an ISA, you currently receive a £2,000 dividend income allowance.
Q: Is Capital Gains Tax (CGT) payable on my ISA investment gains?
A: You don’t have to pay any CGT on profits. You make a profit when you sell an investment for more than you purchased it for.
If you invest outside an ISA, excluding residential property, any profits made above the annual CGT allowance for individuals (£12,300 in 2020/21 tax year) would be subject to CGT.
For basic rate taxpayers, CGT is 10% or more. For higher and additional rate taxpayers, CGT is 20%.
Q: How does a Bed & ISA work?
A: A Bed & ISA allows you to utilise the current year’s ISA allowance by moving investments from an unwrapped environment to the ISA tax-efficient wrapper.
This is achieved by disposing of the unwrapped investment and repurchasing it via an ISA. The disposal of the unwrapped investments may be liable to CGT but, once inside the ISA, the investments are sheltered from CGT in the future.
Q: I already have ISAs with several different providers. Can I consolidate them?
A: Yes, you can, and you won’t lose the tax-efficient ‘wrapper’ status. Consolidating your ISAs may also substantially reduce your paperwork.
Q: Do I have to declare my ISA on my self-assessment tax return?
A: ISAs do not have to be included in your tax return to HM Revenue & Customs. However laws and tax rules may change in the future and your own circumstances and where you live in the UK may also have an impact on tax treatment.
Q: Can I transfer my existing ISA?
A: You can transfer an existing ISA from one provider to another at any time as long as the product terms and conditions permit this.
If you want to transfer money you’ve invested in an ISA during the current tax year, you must transfer the whole balance. For money you invested in previous years, you can choose to transfer all or part of your savings.
Should you wish to switch your current or previous year’s ISA to a different provider’s ISA while simultaneously keeping future tax benefits intact, you have to arrange for a transfer rather than selling and reinvesting.
You can transfer money from a Cash ISA to a Stocks & Shares ISA.
Ready to make the most of your ISA allowance before it’s too late?
With interest rates still at very low levels, you might be looking at investing for the potential to achieve a bigger return from your savings. For more information about how we can help you invest to enjoy a brighter future – please contact us.
This information has been prepared using all reasonable care. It is not guaranteed as to its accuracy, and it is published solely for information purposes. It is not to be construed as a solicitation or offer to buy or sell securities and does not in any way constitute investment advice.
Information based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.
The value of investments and income from them may go down. You may not get back the original amount invested.
Past performance is not a reliable indicator of future performance.