What is an ISA
Introduced on 6th April 1999 to replace the Personal Equity Plans (PEP), an ISA (individual savings account) is a tax-efficient savings and investment account. You can use them to save cash or make investments in stocks and shares.
How they work
Every tax year you will have an annual ISA allowance that allows you to save or invest money up to a certain amount each tax year. You will not pay tax on:
- Interest on cash in an ISA
- Income or capital gains from investments in an ISA
The ISA allowance in 2020/21 is £20,000. The tax year runs from 6th April to 5th April the following year. This means you will have until the 5th April 2021 to save or invest up to this amount. When a new tax year starts, you will have a new annual ISA allowance to use on the first day of the new tax year.
ISA is a use it or lose it allowance. Therefore, if you do not use your full allowance it will be gone in the new tax year and you cannot carry it forward. Your ISAs will not close when the tax year finishes. You’ll keep your savings on a tax-free basis for as long as you keep the money in your ISA accounts.
How much tax is saved with an ISA
You do not pay any tax on money saved or invested in an ISA as long as you do not pay in more than your annual allowance each tax year.
| Tax Band | Income Tax with Savings | Income Tax with ISAs | Capital Gains Tax with General Account | Capital Gains Tax with ISAs |
| Basic Rate | 20% | 0% | 20% | 0% |
| Higher Rate | 40% | 0% | 20% | 0% |
| Additional Rate | 45% | 0% | 20% | 0% |
Who can open an ISA
You need to meet the following to open one:
- 16 or over for a cash ISA
- 18 or over for a stocks and shares or innovative finance ISA
- 18 or over but under 40 for a Lifetime ISA
- Be a resident in the UK
- Have a national insurance number
You can get a Junior ISA for children under 18.
An ISA can only be held in the name of one person. It’s not possible to hold an ISA in a joint name.
What you can include in your ISAs
Cash ISAs can include:
- savings in bank and building society accounts
- some National Savings and Investments products
Stocks and shares ISAs can include:
- shares in companies
- unit trusts and investment funds
- corporate bonds
- government bonds
Lifetime ISAs may include either:
- cash
- stocks and shares
Innovative finance ISAs include:
- peer-to-peer loans – loans that you give to other people or businesses without using a bank
- ‘crowdfunding debentures’ – investing in a business by buying its debt
How to open an ISA
You can simply open an account online, in a branch, via post or telephone. You will need to meet a minimum deposit which can vary from £10 to £1,000.
You will also need to provide person details when you apply, including:
- Full name
- Address
- National insurance number
- Signature
You will need to read the declaration, which will inform you as to how the ISA allowance and the rules work.
How many ISAs can you have
In each tax year, you can only pay into one cash ISA, one stocks and shares ISA and one innovative finance ISA. You can however, pay into a new cash, stocks and shares each tax year.
For example, if you paid into a new cash ISA each tax year since 2010/11 to 2020/21 you would have ten different cash ISA accounts.
Some banks and building societies will let you pay into a second ISA within the same tax year, but only if both ISAs are held with them. Usually, alongside specialist ISAs such as a Help to Buy ISA.
Withdrawing your money
Depending on the terms of your account say that it is flexible or not.
If it is flexible you can withdraw money in the account and repay it back in the same tax year without reducing your current year’s allowance. You can also withdraw money from your previous tax years and have until the end of the tax year to pay it back.
If your ISA is not flexible, then if you withdraw money and try to put it back in then it will count towards your remaining ISA allowance. If your allowance has already been used then the payment will be rejected.
Can you transfer an ISA
If you see an ISA with a better interest rate, you can simply transfer your ISA from one provider to another at any time. This is known as an ‘ISA transfer in’. If you
To switch providers, contact the ISA provider you want to move to and fill out an ISA transfer form to move your account. If you withdraw the money without doing this, you will not be able to reinvest that part of your tax-free allowance again.
It should take no longer than 15 working days for transfers between cash ISAs and 30 calendar days for other types of transfers.
If you transfer cash and assets from a Lifetime ISA to a different ISA before the age of 60, you’ll have to pay a withdrawal fee of 25%.
If you move abroad
If you open an Individual Savings Account (ISA) in the UK then move abroad, you cannot put money into it after the tax year that you move (unless you’re a Crown employee working overseas or their spouse or civil partner). You must tell your ISA provider as soon as you stop being a UK resident.
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.
What happens to your ISA if you die
When your estate is being administered, your ISA will lose its tax-free status from the date of death and your estate will be liable to pay income tax on any interest added to the ISA.
If your spouse or civil partner dies you can inherit their ISA allowance. As well as your normal ISA allowance you can add a tax-free amount up to either:
- the value they held in their ISA when they died
- the value of their ISA when it’s closed
If your spouse or civil partner died from 3 December 2014 to 5 April 2018. Their ISA ended on the date of their death. ISA investments will form part of their estate for Inheritance Tax purposes. Their ISA provider can be instructed to sell the investments and either:
- pay the proceeds to the administrator or beneficiary of their estate
- transfer the investments directly to them
You can inherit their ISA allowance. As well as your normal ISA allowance, you can add a tax-free amount up to the value they held in their ISA when they died.
