ISA FAQsFrequently Asked Questions related to ISAs
We've compiled a list of the frequently asked questions about ISAs.
What is an ISA?
Individual savings accounts (ISAs) are tax-free savings or investment accounts. You won’t pay any tax on any personal interest you earn or gains you make.
There are two main type of ISA – a cash ISA, which works like a regular savings account, and a stocks and shares ISA, which allows you to invest in funds, bonds and individual company’s shares.
There’s a limit to how much you can put into an ISA each financial year. For 2018/19 the limit is £20,000. This can be divided between cash and stocks and shares however you’d like. Any unused allowance doesn’t roll over to the next year, so it’s worth making the most of it, if you can afford to.
You can open an ISA at any point in the tax year. It’s up to you whether you want to set aside a regular amount or deposit a lump sum.
The exact terms of your ISA will depend on the provider. Interest rates vary and some accounts offer instant access to your money, while others require it to be locked away for a set period.
Other types of ISA include Junior ISAs, which are for under-18s. They currently have an annual limit of £4,260
How does an ISA work?
An ISA allows you to benefit from tax breaks when you save. If you hold cash in an ISA, you won’t pay tax on any interest earned. If you hold investments in an ISA, you won’t be taxed on personal income or capital gains.
For the tax year 2018-19, the maximum amount you can put in an ISA is £20,000.
A cash ISA works like a traditional savings account, except the interest is never taxed. A stocks and shares ISA invests in the stock market through funds, bonds, or shares in individual companies.
With an Innovative Finance ISA, you can lend up to £20,000 to other people through peer-to-peer lending, and you receive tax-free interest when the loan is repaid.
If you’re aged between 18 and 40, you can put up to £4,000 a year in a Lifetime ISA. The Government will give you a 25% bonus on your savings. However there are some catches.
Money saved in a Help to Buy ISA can only be used to buy your first home. You’ll receive a government bonus of 25% to help you buy a property.
You can put all your £20,000 allowance into just one type of ISA or split it between all five types provided you’re eligible.
Are ISAs tax free?
A cash ISA is a savings account where the interest you earn is never taxed. Because of the tax benefits, there’s a limit to how much you can contribute annually. This is £20,000 for the tax year 2018/19.
Any interest you earn on an ISA doesn't count towards your personal savings allowance, so you can shield more of your money from the taxman. Basic rate taxpayers can earn up to £1,000 of tax-free interest on any savings account, while higher rate taxpayers can earn up to £500.
A stocks and shares ISA enables you to invest in the stock market through funds, shares and bonds without being taxed on any personal returns. With most investment products, you pay tax on capital gains and dividends if your earnings exceed limits set by the Government, but profits from shares held in an ISA won’t be taxed.
Some investments, such as corporate bonds, pay interest. These are also shielded from tax if held within an ISA.
If you fill out a tax return each year, you don't need to declare any income or capital gains from an ISA to HMRC.
Are ISAs a good investment?
Stocks and shares ISAs can be a good investment for many reasons. If time is on your side, investing can be a great way to help you achieve your long-term financial goals as you can ride out any market fluctuations. However, investments can fall as well as rise and you may get back less than you invest.
Then there are the tax breaks. You’ll benefit from tax-free income, capital gains and dividends.
Many people are understandably anxious about investing because they think it’s too complex. But if you’re new to it, there are some easy ways to get started, such as ready-made funds run by experts.
Stocks and shares ISAs are only a good investment if you manage risk sensibly. The greater the risk, the greater profit you’re likely to make but the more you’re also likely to lose. And remember to factor in additional costs when planning your investments, such as admin charges and fund management fees.
The golden rule of investing is to spread the risk. Be sure to balance your portfolio with a mix of equities, bonds and cash spread across different industrial sectors and geographical areas.
What is a stocks and shares ISA?
A stocks and shares ISA is a tax efficient way of investing in the stock market. Any returns you earn will be sheltered from both income tax and capital gains tax.
Like cash ISAs, there’s a limit to how much you can put in a stocks and shares ISA. For the tax year 2018/19, you can invest a maximum of £20,000. You can choose between making a lump sum investment or regular monthly payments – which can be as little as £50.
A stocks and shares ISA allows you to invest in a wide variety of investment products, including funds, such as unit trusts, shares in individual companies and bonds, whereby you effectively lend money to a company or government in return for interest on the loan.
You can either pick the funds and shares you want yourself or choose ready-made funds where the decision-making is done for you.
Money you already hold in a cash ISA can be transferred to an investment ISA. You don’t have to move all your cash – many people choose to split their savings between cash and investments.
The stock market can be unpredictable, so never invest more than you can afford to lose.
What is a Lifetime ISA?
If you’re aged 18‑89 and looking to save for your first home or retirement, the Lifetime ISA could help you by offering up to £1,000 every year as a free Government bonus.
You’ll enjoy many of the benefits you would find with other ISAs: the option of either a cash or a stocks and shares account; tax-free savings; and interest accrued on everything you save.
However, with a Lifetime ISA, you’ll also receive a 25% bonus from the Government, up to a maximum £1,000, on everything you deposit each tax year. This bonus is paid in cash, meaning you’ll start accruing interest on it right away.
The catch is that funds from a Lifetime ISA can only be withdrawn without a fee to pay the mortgage deposit on your first home, once you have reached 60 years old, or if you are terminally ill with just 12 months to live. If you withdraw money from your Lifetime ISA at any other time, there’s a 25% charge, effectively cancelling out your bonus.
Which ISA is right for you?
With so many ISAs to choose from, it can be difficult deciding which is right for you. While a cash ISA is a safe option, it isn’t going to give you big returns. However, if you’re new to ISAs, it can be a good place to start saving.
If you’re happy to tie up your money for at least five years and are willing to take a risk in return for potentially bigger rewards, you might want to consider a stocks and shares ISA where you invest in the stock market.
A happy medium between a cash ISA and stocks and shares ISA is an Innovative Finance ISA, where you invest in peer-to-peer lending in return for an interest rate of up to 6%.
If you’re saving for a deposit for your first home, a Lifetime ISA can be a good option for under-40s. You can pay in up to £4,000 per tax year, and the Government will top up any contributions by 25%.
A Junior ISA allows parents to set up a savings account in the name of their child. Although the annual allowance is only £4,260, the interest rates offered are usually considerably higher than adult cash ISAs.
When is interest paid on my ISA?
How often is interest paid on an ISA?
When interest is paid out varies from ISA to ISA and provider to provider. It tends to be one of these options:
- Paid monthly on a set date
- Paid annually on a set date
- Paid annually on the anniversary of your account opening
Some ISAs may even give you a choice of monthly or annual interest.
How can I see when interest is paid on an ISA?
To be absolutely sure you are getting the right information, the best place to look is the terms and conditions of any ISA you have or are considering. How interest is handled should be spelled out there.
What is a Junior ISA
A Junior ISA is a tax-efficient savings account that can be set up by parents in their child’s name. Its annual limit is lower than an adult ISA - £4,260 for the tax year 2018/19 – but the interest rate is usually better.
There are two types of Junior ISA. A cash Junior ISA works in much the same way as a regular savings account, except money can’t be withdrawn until your child turns 18. A stocks and shares Junior ISA lets you invest in the stock market through funds, shares and bonds. Your child can have one or both types of ISA, and no tax is payable on any interest or investment gains.
Once a Junior ISA has been opened, parents and other family members can save on the child’s behalf as long as the total deposited doesn’t exceed the annual allowance. You can set up regular instalments by direct debit or make one-off payments.
Your child cannot access the funds until they turn 18, at which time the account is automatically rolled over into an adult ISA. Your child can continue to save or take the money out and spend it however they like.
What is a cash ISA?
A cash ISA is a type of savings account where you never pay tax on the interest you earn. The tax breaks are cumulative, so the more you build up your savings, the more you’ll benefit.
Any UK resident aged 16 or over can open a cash ISA, but there’s a limit to how much you can deposit each year. For the tax year 2018/19, the limit is £20,000. You can invest the full amount in cash if you want or split your allowance with a stocks and shares ISA.
There are two main types of cash ISA. Easy access ISAs allow you to get at your money when you want and usually pay a variable rate of interest. Fixed-rate ISAs pay a fixed rate of interest for a set term, such as 1.8% fixed for 3 years. You have to be prepared to lock your money away for a set period as there’s usually a penalty for withdrawing early.
If you decide to transfer your ISA, ask your new provider to make the switch. If you withdraw the cash yourself from your old ISA and put it into a new one, you’ll lose your tax benefits.
What happens if I take money out my ISA?
If you have a cash ISA, you won’t lose any tax benefits by making withdrawals, but fees and penalties may apply.
With an instant access cash ISA, you can withdraw money when you want without restriction. That isn’t the case with a fixed term cash ISA as you will usually have to pay a penalty to access your money, typically a certain number of days’ interest.
If your ISA is flexible you can withdraw money and replace it during the same tax year without it affecting your current year’s allowance.
With a stocks and shares ISA, you can withdraw your money whenever you want. Most investment platforms don’t currently offer flexible stocks and shares ISAs, so if you take out money and reinvest it at a later date within the same tax year, it will count towards your annual ISA allowance.
There are strict withdrawal rules surrounding Lifetime ISAs. You’re not allowed to take money out until you turn 60 without paying a penalty unless it’s specifically put towards buying your first home or you have less than 12 months to live. The withdrawal charge will be 25% of the amount you take out.
Can I transfer my ISA to another provider?
If you're fed up with poor returns on your ISA or your teaser rate has just disappeared, it is possible to transfer to another provider. But you must follow the right procedure to ensure that your savings and investments don't lose their tax-free status.
You can switch ISAs between providers, but not all providers are willing to accept transfers, or they may have rules about when and how they accept them, so you will need to check first with any transfers you are considering.
You can also transfer from one type of ISA to another, for example from a cash ISA to a stocks and shares ISA, as long as you follow the rules.
Your original ISA provider might charge a penalty, for example if you try to move from a fixed-term ISA before the whole period has expired, so check to see what you might need to pay if you move your funds or investments.
Transferring ISAs is a simple process, once you have found a willing provider to transfer to. Just fill out a form and they will do the hard work and contact your original provider.
Can I have an ISA and a savings account?
There's absolutely no reason why you can't have both a savings account and an ISA at the same time, so you need to work out which is more beneficial to you. This will depend on your personal circumstances.
If you want to buy a home then getting a Help to Buy ISA will pay you a bonus from the Government in addition to any interest, but you can only use it toward purchase of a home. The Lifetime ISA for the under 40s also pays a bonus, so if you are eligible for one it is worth considering.
Both ISAs and the Personal Savings Allowance offer you tax benefits from saving, but you have to consider the pros and cons and see which will best fit your situation – especially if you can save less than the ISA allowance.
If you will potentially exceed either or both your annual ISA allowance or Personal Savings allowance it makes sense to use both to maximise the amount of interest you can earn tax free.
How many ISAs can I have?
The amount you can save or invest in ISAs is governed by an annual limit – currently £20,000 for the 2018/19 financial year. However, this doesn’t mean you’re limited to one ISA account – you can split this allowance between different types of ISA and also retain ISA accounts from previous years.
There are two main types of ISA; cash ISAs, which act like a regular savings account but with tax benefits, and stocks and shares ISAs, which allow you to invest in a variety of funds, bonds and individual company’s shares. There are also Innovative Finance ISAs, which allow people to receive tax-free interest and capital gains on funds lent through peer-to-peer lending platforms, and Lifetime ISAs, which are specifically for saving for a first home or retirement.
You can split your ISA allowance between these four types of account, whichever way you choose. You can, however, only pay into one of each type per year.
You may, for example, choose to put £4,000 into a Lifetime ISA (the maximum you can save in this type of account) to benefit from the 25% bonus offered by the Government. You can then split the remaining £16,000 however you choose.
While you can only pay into one of each type of ISA each financial year, you can retain ISAs from previous years, meaning you could build up quite a collection over time.
How much can you put in an ISA?
For each tax year there is a maximum amount you can deposit in an ISA. For 2018/19, that limit is £20,000. This is commonly referred to as your ISA allowance.
You can split your allowance across any combination of ISAs, such as cash and stocks and shares. Some people can also have a Help to Buy ISA and Lifetime ISA, although there are smaller limits with these.
To open a Lifetime ISA, you must be aged between 18 and 40. You can only pay in £4,000 each year, but the Government will then add a 25% bonus on top – so you can earn an extra £1,000 a year.
Help to Buy ISAs are only open to first-time buyers. You can deposit £1,200 in the first month, then put in up to £200 a month after that. The Government will give you up to a maximum of £3,000 to help you buy your first home.
If you have a Junior ISA for your child, you can save up to £4,260 each year until they turn 18.
You’re not allowed to carry your allowance over to the next tax year, so you’ll lose it if you don’t use it.
Please remember the value of your investment and any income from it may fall as well as rise and is not guaranteed. You may get back less than you invest.