The individual savings account (Isa) is a flexible way to save and invest that can bring large tax benefits, especially for higher earners. However, the rules can seem complicated at first. Here’s what you need to know.
What is an Isa?
An Isa is a special type of tax-efficient account. It’s not an investment in itself – it’s more like the “wrapper” that goes around your savings and investments to protect them from the taxman. An Isa allows you to save or invest up to £20,000 every year (as of 2017/18 – the limit changes each tax year in line with inflation) and pay no tax on capital gains, interest and dividend income within the account. You don’t get tax relief on your contributions, but your money can be withdrawn at any time without paying tax. This makes Ias different from pensions, where you get a tax break on contributions, but are taxed when you take it out.
What types of Isa are there?
There are now several main types of Isas.
Cash Isas are tax-free savings accounts and are provided by banks and building societies.
Stocks and shares Isas allow you to invest in stocks, bonds, funds and some other investments and are provided by stockbrokers and fund supermarkets.
The Innovative Finance Isa allows you to invest in peer-to-peer lending with an Isa wrapper.
Help-to-Buy Isa, which is aimed at first-time buyers who are trying to build up a deposit for their first flat or house. The government tops up your savings by 25%, up to a maximum of £3,000. You cna only save up to £2,400 a year in a Help to Buy Isa.
The Lifetime Isa is meant to help you buy your first home or save for retirement. It is only available to those under 40. You can put in £4,000 a year until your are 50, and the government adds a 25% bonus up to a maximum of £1,000 a year.
Can I have more than one Isa?
You can split your annual £20,000 contribution between the different types of Isa in whatever proportion you like. However, you can only contribute to one of each type of account at a time in each tax year (although some providers now offer “split” Isas with a variable rate and a fixed-rate cash Isa in the same account). You can keep previous years’ Isas open, transfer them to new providers and change the investments you hold in them. There are extra rules for Help-to-Buy and Lifetime Isas, but essentially they are a type of cash Isa (for more).
How do I move my Isa?
You can transfer your Isa between different providers as many times as you want without it reducing your annual allowance. So if you put £15,000 into a cash Isa last year and want to move it to a new bank with a better interest rate, you can do that and also pay £20,000 into a new Isa this year as well. You can also – in theory – move money freely between cash Isas and stocks and shares Isa. An Isa provider can’t stop you transferring out, but they can insist only the whole account is transferred and charge transfer fees for investments – and they are not obliged to accept transfers in. However, if you want to move your Isa, you must make a formal transfer request through the provider you are moving to. You can’t just take the money out to pay into the new provider, because that counts as a withdrawal.
What are the rules for withdrawals?
The old rule was that you can take your money out of an Isa at any time, but you lose that part of your allowance (in other words, you can’t pay it back in again without it counting as part of your contribution for the current tax year). But in April 2016 the rules became more flexible and some Isas will allow you to take out and pay back money within a tax year (but not take it out in one tax year and pay it back in another). However, providers do not have to offer this flexibility on their accounts, so check the rules and accounts terms very carefully. Help to Buy and Lifetime Isas have stricter rules, however.
This article was originally written in March 2016 and last updated in March 2018