ISA stands for Individual Savings Account. Unlike a standard savings account you may have with your Bank or Building Society, an ISA allows you to save or invest up to a set amount (your ISA allowance) each tax year without having to pay tax on interest, dividends, or gains. With ISA season fast approaching, here is some helpful advice on ISA’s.
What is an ISA Allowance?
Your ISA allowance is the maximum amount you can save tax free during the current tax year.
You get a new ISA allowance every year, which is set by the UK Government. The ISA allowance for the current tax year is £20,000. The tax year runs from April 6th to April 5th. ISA allowances can’t be carried over from one tax year to the next, so if you don’t pay in your full allowance before April 5th, you’ll lose the rest of that year’s allowance.
Anything you save into an ISA after April 5th will be counted as part of your ISA allowance for the new tax year. Use it, don’t lose it.
Types of ISA
There are several different types of ISAs, each one designed for a particular kind of saving or investing. The various types of ISA available include:
• Cash ISA – A Cash ISA is very similar to an everyday savings account except any interest it pays will be tax free. These come in a variety of different forms such as Instant Access, Notice Accounts and Fixed Rate.
• Stocks & shares ISA – Stocks and shares ISAs, also known as investment ISAs, allow savers to invest in a range of different assets e.g. funds, property or bonds. Any investment gains you make will not be subject to capital gains tax, income tax or dividend tax. The only tax that might need to be paid is stamp duty when buying shares. Unlike Cash ISAs, these can fall in value as well as rise.
• Innovative finance ISA – An innovative finance ISA lets you use your ISA allowance while investing in peer-to-peer lending (otherwise known as P2P). P2P lending is where you lend money directly to borrowers and businesses. The borrowers then pay back the borrowed amount, with interest on top. The interest they pay is the return you get on your investment. You will earn this interest tax-free. The rate of interest can be higher for this type of ISA, however there is no guarantee with the money you lend, and you could get nothing back.
• Lifetime ISA – Lifetime ISAs (LISAs) can be opened by anyone aged 18 to 39 and is a dual-purpose ISA, designed to help those saving for a first home and retirement. The government will also add a 25% bonus to your savings, up to a maximum of £1,000 per year. The money you pay in counts towards your £20,000 ISA limit. You can only withdraw cash if you’re buying your first home or you’re 60 or over.
• Junior ISA – This works the same way as other ISAs but is specifically designed for children. You can open a junior ISA for your child at any point, putting away up to £9,000 each year. The money is locked in and cannot be withdrawn until age 18. No tax will be paid on the interest they earn on their savings.
Currently Harpenden Building Society only offers a Cash ISA account.
How many ISAs can I have?
New rules were introduced on 6th April 2024, you can now open as many ISAs as you want in a tax year. However, you still have the same ISA allowance of £20,000 across these accounts.
Transferring ISAs explained
An ISA transfer is the process of moving your savings from an existing ISA account to another one. This can be done between different types of ISAs, such as from a Cash ISA to a stocks and shares ISA, and vice versa.
The transfer is co-ordinated through the new ISA provider to ensure that the tax-free status remains intact. Transferring your ISA can offer several advantages:
• Access to possible better returns on your savings or investments.
• Merging of multiple ISAs into one account for simpler management.
• The transfer process is usually straightforward and handled by the new provider.
ISA transfer process
If you want to transfer an ISA to a different provider, this is how it works:
• Find the ISA product you want to transfer your old or current ISA to.
• Check the terms and conditions for any charges/penalties that may affect you transferring an ISA.
• Contact the provider of the ISA you want to transfer to.
• Complete the ISA transfer form they provide you with (this is either a paper form or online form).
• Your new ISA provider will do the rest and contact you once completed.
• Do not close your account yourself and transfer the money to your new provider, as you’ll lose your tax-free status.
How long does an ISA transfer take?
The exact time it takes depends on your ISA provider and if they use a paper ISA transfer request, the process could take a lot longer. Usually, Cash ISAs can take up to 15 days to transfer, whereas stocks and shares ISAs may take up to 30 days.
Topping up your ISA
If you’ve got an ISA, you can top it up as often as you like so long as you don’t go over your yearly ISA allowance. How you top up your ISA will be fully dependent on your ISA provider. Remember, you’ll need to top up your ISA before 5th April if you want to make the most of your ISA allowance for the current tax year.
ISA withdrawals
Before withdrawing any amount, please check the T&Cs of your ISA product to see if you may incur a charge. Any amount you withdraw is typically not taxable. But ISA withdrawals will reduce your annual ISA allowance (set at £20,000). When you withdraw from an ISA account, that chunk of your allowance is now used for the tax year. For example, if you are currently contributing £12,000 to an ISA account, and withdraw £5,000 before the end of the current tax year, your allowance remaining will be £8,000.
Rules are slightly different if you have a flexible ISA however, money can be moved in and out of the account without affecting your yearly ISA allowance, as long as it’s replaced the same tax year. Your ISA provider will be able to tell you if your product is flexible.
• Lifetime ISAs: If money is withdrawn early, you’ll forfeit the 25% government bonus that is on offer.
• Cash ISAs: If you have an easy/instant access Cash ISA, you will be able to take out money whenever you like. If it is a fixed Cash ISA, you can access your money, but you will most likely have to pay an interest penalty.
• Stocks and Shares ISAs: You’ll need to sell funds, bonds or shares to withdraw your cash – typically this can take a few days.
• Innovative Finance ISAs: This can be more difficult to get your cash back, as you’ll need to sell your investments.
• Junior ISAs: Any money invested is locked away until the child you’re saving for turns 18. View our PDF here
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