ISAs: your back-to-basics guide for 2018/19
Here’s everything you need to know to make the most of your unused ISA allowance ahead of the 5 April deadline.
An individual savings account – more commonly known as an ISA – is still considered one of the best places to put your savings because of its tax-free status, year after year.
By saving or investing in an ISA, you’re effectively putting your money into a ‘tax wrapper’ which prevents the tax authorities from getting their hands on it.
Whether you’re new to ISAs, need a refresher or want some inspiration, our guide is here to help you get up to speed:
The annual ISA limit
The government sets the annual ISA allowance. This is how much money you’re allowed to save or invest in an ISA each tax year. For the current tax year, which runs from 6 April 2018 to 5 April 2019, the limit is £20,000. The allowance is not changing for the 2019/20 tax year.
Different ISA products
There are currently six different ISA products available.
- Cash ISA
Cash ISAs are simple savings accounts where no tax is due on any interest you make. There are a whole host of cash ISA products available from banks and building societies offering varying rates of interest. Some are instant access, others are notice accounts meaning you have to give advance warning if you want access to your cash. See YourMoney.com’s Is it time to transfer your cash ISA into stocks and shares? for more information.
- Stocks and shares ISA
These are investment-based products, so naturally they’re riskier than cash versions. You can invest in shares of companies or funds or investment trusts – pooled investment products run by a fund manager. These products are suitable for meet medium to long-term goals like children’s university fees and for investing for and in retirement. As well as earning tax-free returns, any gains are also exempt from capital gains tax.
You can open a stocks and shares ISA on an online investment platform. There are various platforms on the market all with slightly different services, administration fess and dealing charges. Some of the big names include Hargreaves Lansdown, Fidelity, The Share Centre and Bestinvest.
Robo-advice firms such as Nutmeg and Wealthsimple offer a ‘no hassle’ way to invest and typically have lower minimum deposit requirements, although you have less control over the exact investments.
Investing your money can be a big decision and if you can’t decide which asset classes to opt for, but do not want to miss out on this year’s allowance, you can ‘park’ your money temporarily in an ISA cash park on your platform. Remember your ISA allowance is given on a ‘use it or lose it’ basis. By ‘parking’ your cash, you can secure the allowance for the current tax year even if you haven’t decided where to invest.
- Junior ISA
There are junior cash and junior stocks and shares ISAs, which, as the name suggests, are savings products aimed at children (under 18s). They work in pretty much the same way as their adult counterparts – except they have different contribution limits (£4,260, rising to £4,368 for the 2019/20 tax year) and money in a junior ISA cannot be accessed until the child is aged 18. If you have a Child Trust Fund, you can transfer to a Junior ISA.
- Help to Buy ISA
Launched in December 2015, the Help to Buy ISA is aimed at first time buyers. They can earn tax-free interest and receive a 25% boost (maximum £3,000 on £12,000 saved) to their coffers from the government when they come to make a purchase. Two first-time buyers together can get double.
The scheme is only valid on homes worth up to £450,000 in London or £250,000 anywhere else in the UK and new accounts can be opened until 30 November 2019, though additions to existing accounts are permitted until November 2029. See our full Help to Buy ISA: the facts for more information.
- Innovative Finance ISA (IFISA)
Innovative Finance ISAs (IFISAs) are available through peer to peer (P2P) lending platforms. The platforms match individual borrowers or companies with savers who are willing to part with their money in the hope of getting higher rates of interest than they’d get from mainstream savings products.
While the relatively high rates of interest make it attractive, P2P isn’t protected by the Financial Services Compensation Scheme (FSCS) so if anything goes wrong, you will lose your money. But the IFISA is eligible for the usual ISA tax advantages. See our full Peer to Peer lending guide for more information.
- The Lifetime ISA
The Lifetime ISA (LISA) allows you to save for a first house and retirement, as long as you’re aged between 18 and 40.
You can save up to £4,000 each tax year into a LISA and you’ll receive a government bonus of 25% (£1,000 max. each tax year). But the money must either go towards your first home (worth up to £450,000 at any time from 12 months after opening the account) or retirement. An important point to note is that there is a 25% exit penalty if money is withdrawn before the age of 60 and/or it’s not used towards a first home (apart from first year of the scheme 2017/18). See our full Lifetime ISA guide for more information.
Transfer money between different ISA products
Savers can only pay into one cash, one stocks and shares ISA and one IFISA. The rules state you can transfer money from one cash ISA to another cash ISA or to a stocks and shares ISA. See YourMoney.com’s A practical guide to moving from a cash to stocks and shares ISA for more information.
You can also transfer a stocks and shares ISA to another stocks and shares ISA, or from a stocks and shares ISA into a cash ISA. If you do this, you’ll still have the same £20,000 allowance though you may need to check whether your new provider accepts previous years’ allowances that you’ve built up tax-free.
You can also deposit money into an IFISA or transfer money from existing ISAs into the scheme and vice versa. Though it’s best to check the new provider accepts transfers, as not all of them will. The process has to be done via your bank or building society. If you withdraw any of the money yourself, you will lose the tax-free status.
You can mix and match money in ISAs
You can have up to £20,000 in ISAs and can mix and match between cash, stocks and shares and IFISAs. It’s a little more complicated when it comes to the Help to Buy ISA, which is technically a cash ISA, as the rules state you can only have one cash ISA at any point.
However some providers, such as Nationwide, allow you to split your money into one of each – a cash ISA and Help to Buy ISA – though the £20,000 allowance still applies. As an example, if you put the maximum amount allowed into a Help to Buy ISA (£3,400 in your first year) you’ll be able to deposit up to £16,600 in another cash ISA product.
ISAs are flexible
Since April 2016 some ISA providers have offered a flexible ISA, which means savers can withdraw and replace their savings within the same tax year without losing the full ISA tax benefits. Stocks and shares ISA providers can also allow this facility if the flexible options are made via a cash trading account.
ISA benefits can be passed on to your spouse
If you save into an ISA, it means you can grow your money in a tax efficient way. Unfortunately, after death, this benefit ends – unless you’re married or in a civil partnership.
While ISAs can’t be transferred between spouses during their lifetime, they can be transferred on death to the surviving spouse while retaining their tax-free status.
The survivor can receive an increased allowance equal to the value of their late husband’s, wives or civil partner’s ISA value which they could ‘top up’ with the value passed to them on death. As an example, at the time of death (must be on or after 3 December 2014), if your spouse had saved £20,000 in their ISA, in addition to your individual limit of £20,000, you’d also get a separate one-off £20,000 ISA allowance for that tax year.