Overview
What is an Individual Savings Account?
An Individual Savings Account (ISA) is a tax-free saving or investment account. Types of ISAs include Cash ISAs, Stocks and shares ISAs, Junior ISAs, and Lifetime ISAs.
In the 2023 to 2024 tax year, the maximum you can save in an ISA is £20,000, JISA £9,000 and LISA £4,000. You can put money into one of each kind of ISA each tax year.
BENEFITS
What are the benefits of an ISA?
- Your money will grow tax-free
- The annual allowance for the current tax year is £20,000 and starts afresh each new tax year
- You can transfer existing ISAs into a new ISA
- You don’t pay tax on any dividends paid inside your ISA.
- Capital gains generated within a stocks and shares ISA are exempt from tax
- Children aged between 16 and 18 can hold both a Junior and a standard Cash ISA
- Specific ISAs are available to help when saving towards your first home or retirement.
Use Your Tax Efficient Allowance – Or Lose It!
You get one ISA allowance per tax year, so use it or lose it, when the tax year ends on 5 April.
Any unused ISA allowance will not be rolled over into a new tax year. On 6 April when the new tax year starts, if you haven’t used all of your or your children’s ISA allowances from the previous tax year, they will be lost forever.
CHILDREN
What is a Junior ISA?
The account must be opened by the child’s parent or guardian. However, relatives and friends can also contribute to your child’s Junior ISA, as long as the £9,000 limit for 2023/24 is not breached.
Savings in a JISA account cannot be withdrawn until the child reaches 18. Any child owning a Child Trust Fund (CTF) can’t hold a JISA. If you want to open a Junior ISA ask the provider to transfer the CTF into it.
THE FUTURE
What is a Lifetime ISA?
If you are aged 18-39, and looking to save for your first home or for later life (retirement), you could consider a LISA.
You can hold cash in a LISA or choose to invest it just as you would with a Stocks & Shares ISA. You can put in up to £4,000 each year up to and including the day before your 50th birthday. But remember that this £4,000 allowance contributes to your full annual ISA allowance.
The government will pay a 25% bonus on your contributions (£1 for every £4 you put in), a maximum of £1,000 a year. Nevertheless, you must be aware that a charge of 25% will be applied to any withdrawal. This is if it is for any reason other than buying your first home, at age 60+ or if you are terminally ill.
You can use your savings to help you buy your first home if all the following apply:
- The property costs £450,000 or less.
- You buy the property at least 12 months after you make your first payment into the Lifetime ISA.
- You use a conveyancer or solicitor to act for you in the purchase. The ISA provider will pay the funds directly to them.
- You’re buying with a mortgage.
If you decide to use the LISA to help buy your first home, you can retain the account and keep saving in it for your retirement.
Under the normal LISA rules, you can take some or all of your cash out of a LISA before age 60 even if you’re not buying a property – but you’re charged 25% of the amount withdrawn,
INVESTING
What is a stocks and shares ISA?
A stocks and shares ISA (Individual Savings Account) is a type of tax-efficient investment account. It allows individuals to invest in a wide range of assets, such as stocks, shares, bonds, and funds, without having to pay capital gains tax on the returns generated within the account. Most income from your stocks and shares ISA is also tax-free.
- Stocks and shares ISA provides a wide range of investment options. You can choose individual company stocks, exchange-traded funds (ETFs), mutual funds, government bonds, corporate bonds, and other financial instruments. This diversity allows you to create a diversified investment portfolio based on your risk tolerance and financial goals.
- You have a total tax-efficient allowance of £20,000 for this tax year. This means that the sum of money you invest across all your ISAs this tax year (Cash ISA, Stocks & Shares ISA, Lifetime ISAs, Innovative Finance ISA, or any combination) cannot exceed £20,000.
- You can transfer your existing ISA from one provider to another without losing the tax benefits. Transferred amounts also do not impact this year’s allowance of £20,000. This allows you to take advantage of better investment opportunities or lower fees offered by different ISA providers.
