Individual Savings Accounts – ISAs
ISAs, or individual savings accounts, are a type of savings account with untaxed gains. These are a great option for traders with a lower risk appetite and a desire for medium to long term growth. This 2024 ISAs guide will explore what these are and review how they work, their advantages and disadvantages and any other relevant information. So, read on for everything you need to know regarding ISAs for 16, 18 or 50-year-olds.
Top Brokers With ISAs
What Are ISAs?
An individual savings account (ISA) is an account where the interest is not taxed and there is no capital gains tax (CGT) applied. ISAs allow people to invest in stocks, indices, investment funds and other financial instruments to earn greater profits through the exemption from tax, which makes them an attractive prospect for many people, traders and otherwise. There are many providers in the UK and Ireland, including brokers, banks such as Nationwide, HSBC, Santander and Zurich, as well as building societies like Yorkshire B.S., Newcastle B.S. and Nottingham B.S.
How Do ISAs work?
For every tax year, there is a limit to the amount of money that someone can deposit into their individual savings accounts, called an ‘allowance’. This allowance is determined by the Government and can change from year to year – the allowance for the 2021/2022 tax year, for example, was set at £20,000. Once you have reached your yearly allowance, you can deposit no additional funds until the start of the new tax year, April 6th, when your allowance resets to the full amount. The allowance is spread across all ISAs per person, so, if you have a cash ISA and a lifetime ISA, the sum of your contributions into both cannot surpass £20,000.
There are some providers of ISAs that include ‘flexibility’ whereby you can replace the money that you withdraw within the year. For example, if you withdraw £10,000 from an ISA, you can deposit the £10,000 again in addition to the full £20,000 allowance all tax-free, though not all providers will allow this. For instance, Lloyds Bank does allow flexibility, Halifax only allows flexibility on the
ISA Saver Variable and both Natwest and the Leeds B.S. do not.
Types Of ISAs
The four main types of ISA are cash, stocks and shares (also known as investment ISAs), innovative finance and lifetime ISAs. It is worth noting that, unlike regular bank accounts, you cannot open a joint ISA account.
Cash
Cash ISAs are similar to traditional savings accounts, just with the benefit of the tax-free allowance. Anyone who is 16 years old or over is allowed to open a cash ISA. There are junior cash ISAs available for students and young savers under 16 years of age, though they cannot take control of the account until they turn 16 and they may only withdraw funds from their 18th birthday. Furthermore, junior accounts only have an allowance of £9,000 per year, rather than the usual £20,000, though they are a good idea for people to help support their children and grandchildren.
Cash ISAs come in two forms: easy access and fixed-rate. Easy access accounts allow people to withdraw their funds whenever they wish without charging a penalty. This type of ISA is best for someone unsure if they will need to access their savings often. With fixed-rate accounts, you may still be able to withdraw your funds but it will incur a fee. The benefit of this type of cash ISA is that the interest rates will be higher and so prove to be a better option for those with funds to spare that they are unlikely to need in the short to medium term. There is a variety of different fixed-rate ISA terms, such as 6 months, 1 year, 2 years, 3 years, 5 years and 7 years.
Stocks & Shares ISA
Investment ISAs allow users the opportunity to make greater profits from buying, selling and trading stocks and shares. While there is still a £20,000 investment allowance per year, all capital gains and income from investments are un-taxed. In addition to stocks and shares, investments can be made into other financial instruments such as ETFs, bonds, funds and trusts. As with all trading, there is a
risk involved as the value of these investments may decrease over time. Furthermore, you cannot offset any losses made on investments in your ISA using external assets.
Innovative Finance ISA
These provide access to a large peer-to-peer lending network that consists of individuals and companies that are looking to borrow funds. Innovate finance ISAs typically have higher interest rates as these investments come with greater risk and a lower diversification. Loans to individuals represent a lower risk as the funds are highly diversified and this market is particularly stable.
There is a range of interest rates for loans made to businesses, with the highest rates for companies with a greater chance of defaulting. Finally, some providers make real estate loans, which also have varying interest rates depending on the projects they lend for.
Due to the higher risk associated with the innovative finance ISAs, the Financial Conduct Authority (FCA) restricted communications from platforms to high-net-worth individuals, certified ‘restricted investors’ and both certified and self-certified sophisticated investors.
Lifetime ISAs
These are ISAs with a focus on providing funds for important milestones in life, such as making a deposit on your first house or saving for retirement. These accounts can only be opened by people aged 18 to 39. In addition to the tax-free contributions, the Government offers a bonus scheme whereby they will contribute an additional 25% of your investments up to a total bonus of £1,000. You can continue to deposit funds after contributing £4,000, though you will receive no additional bonus contributions from the Government. The ‘help to buy’ ISA programme that was previously in place was also set up to help young people obtain their first mortgage with contributed bonuses of up to £3,000. Unfortunately, this ISA stopped accepting new applications in 2019. Please note that, if you wish to use a lifetime ISA for getting your first mortgage, you need to wait a full calendar year after opening the account to use the funds.
How To Compare ISAs
- Risk: There are inherently higher risks with innovative finance and investment ISAs as your funds are invested or lent to entities that may lose value or default.
- Potential Returns: Investments in cash and lifetime ISAs may grow at a slower rate than those of innovative finance and investment accounts, meaning lower profits. All of the legal and general (L&G), compare the market, money supermarket and the money-saving expert websites contain up-to-date comparisons of providers to find the best interest rates available.
- Ease Of Access: Before selecting an ISA you need to determine how often you may need to access and withdraw your funds. Some ISAs will charge you a penalty to withdraw and others will offer lower investment rates if you wish to have easier withdrawals. You will need to familiarise yourself with the withdrawal process, the time taken and if you need to give prior notice.
- Initial Deposit Amounts: You can set up some ISAs for as little as just £1, which is particularly helpful for people interested in lifetime ISAs to help with getting on the property ladder as they can start the clock on the year-long wait before.
- Providers: You will need to compare the accounts that each provider has available. For example, Barclays does not provide lifetime or innovative finance ISAs, while M&G Investments only provides stocks and shares accounts. Additionally, you should consider how trustworthy and reliable the providers are to best protect your funds.
- Additional Benefits: Some ISAs will offer cashback on fund transfers in and some providers may facilitate some counselling or investment advice.
How To Open An ISA
- Check Eligibility: You must be over 16 to open your own account and you have to be a UK resident.
- Research Providers: There are many ISA providers to choose from, such as M&S Bank, Virgin Money, Yorkshire Bank, NS&I and Nationwide B.S. Each will have its own advantages and disadvantages such as interest rates, minimum deposits and fees.
- Apply For An ISA: Your application can be made online when you login to your account, via phone call or in-person in a branch.
- Invest: Once your account is open, you can start contributing, investing if suitable and earning.
ISAs & Tax Considerations
UK
Those that earn at a basic tax rate of 20% are given an allowance of £1,000 from earnings from the interest in their ISAs. For the higher tax rate of 40%, this interest allowance is £500. Those that earn enough to be in the additional tax bracket of 45% are not given any tax-free allowance on earnings from interest.
Germany
The closest equivalent to ISAs in Germany is a VL (or “Vermögenswirksame Leistungen”) account, whereby workers and employers contribute to an investment account. The employers are in control of where the investment goes but they contribute up to €40 per month. As an employee, you may earn up to €801 per month tax-free from these investments.
France
The French Plan d’Epargne en Action (or ‘PEA’) is similar to stocks and shares ISAs in the UK as account owners pay no tax on the profits they earn from investments into French and European stocks. There is no maximum time limit on how long the account accrues value for, though there is an upper limit of €150,000 per person or €300,000 for a couple with a joint account.
USA
There is no direct equivalent to UK ISAs in the USA but the closest would be the Roth IRA (Individual Retirement Account). This account allows tax-free earnings on investments into stocks, bonds, ETFs and mutual funds to save for retirement, pay for college education or purchase your first house. In 2021, those under 50 may contribute a maximum of $6,000, while those over 50 may contribute up to $7,000. Only those that earn less than $144,000 as a single or $214,000 per annum (limit for 2022) as a couple may open a Roth IRA.
Canada
A tax-free savings account (TFSA) is Canada’s version of UK ISAs and also do not charge tax on any interest, dividends or capital gains earned by the funds in the account. Owners of a TFSA can invest their funds into bonds, funds, stocks and guaranteed investment certificates. The current yearly contributions are limited to a maximum of C$6,000 and, if this allowance is surpassed, the account is charged a 1% penalty every month until the contributions for the year return to the limit. One particular advantage of the TFSAs is that the missed yearly contributions carry forward to the following year, as long as you have been eligible. This means that, if you were eligible to contribute in 2020 but did not make one, then you may contribute C$12,000 to your account in 2021.
Pros Of ISAs
- Tax-free savings
- Many different providers to choose from
- Range of ISA types for different purposes
- Easy to access with options for small deposits
Cons Of ISAs
- ISA allowances cannot be carried forwards
- Not all accounts allow flexibility with deposits and contributions
- There are some ISAs that you cannot touch as withdrawals are not allowed
Final Word On ISAs
There are many different types of ISAs, which means there is something for everyone, whether you are saving for a pension and retirement plan with a lifetime ISA or looking to boost medium-term profits through an investment ISA. These ISAs are particularly good for tradings as they can earn additional gains through tax-free investment profits. You can find the rules, definitions and key information explained above, though we recommend you thoroughly research the accounts offered by each provider before committing.
FAQs
What Happens To An ISA When Someone Dies?
After the death of the owner of an ISA, the assets or the value of funds within the ISA are transferred to the spouse or civil partner. From 6 April 2018, the ISAs of the deceased are converted into a ‘continuing ISA’ in which the value can accrue value tax-free for three further years. The assets in a stocks and shares ISA transfer upon the death of the account owner to their spouse or civil partner only if the spouse also has a stocks and shares ISA with the same provider. While the spouse will benefit from further tax-free allowances, post-death, their ISAs will form part of their estate and may be subject to inheritance tax (IHT). You do not need to wait for probate.
How Much Can I Invest In ISAs?
In the 2021/2022 tax year, you can invest £20,000 into all of your ISAs. This allowance changes every tax year, so be sure to stay up-to-date.
Are ISAs A Good Investment?
For people that wish to earn greater profits from trading investments or save money for the future, such as for pensions, they represent a great opportunity. There are many websites you can use that have compared the top five ISAs available. It can be helpful to use a calculator to determine what your potential returns on investments are.
Can I Open Two ISAs In One Year?
You are allowed to open and to contribute to one of each type of ISA per year, meaning you can open a cash, investment, innovative finance and lifetime in the same year. You cannot, however, open two lifetime individual savings accounts, for example. To stay up-to-date with relevant news, you can check out social media like YouTube and Twitter or visit the gov.uk website. If you have accidentally paid into or opened two ISAs of the same type in one year, call the HMRC helpline to resolve the issue.
What Happens To My ISA After Moving Abroad?
Unless you are a Crown employee that is working abroad, you will no longer be able to make contributions into your ISA once the current tax year ends.