What is an ISA?

An Individual Savings Account (ISA) is simply a wrapper which protects any savings or investments held within it from taxation. This means that any interest earned on savings or income, or capital gains made on investments held within the ISA is tax-free and does not need to be included on a tax return.

What ISA options can you chose from?

Broadly speaking, if you are a UK resident, there are currently five different ISAs to choose from:

• Cash ISAs (available to those aged 18 or over).
• Stocks and shares ISAs (available to those aged 18 or over).
• Innovative finance ISAs (available to those aged 18 or over).
• Junior ISAs – Cash and Stocks and Shares options (available to those aged under 18)
• Lifetime ISAs (available to those aged 18 or over and under 40).
NB the maximum that can be paid into a Lifetime ISA is currently £4,000 per annum.

In the Spring Budget 2024, the Chancellor also announced a consultation into a potential new ISA, a UK ISA, but the details of this are still to be confirmed.

The current ISA allowances are £20,000 per annum for adult ISAs and £9,000 for Junior ISAs. You get a new allowance at the start of each new tax year, starting on 6th April, which means that overtime you could build a substantial tax-efficient savings fund.

However, it should be noted that any unused allowance is lost at the end of the tax year and cannot be carried over into the next, so it is a "use it or lose it" scenario.

You can split your allowance between multiple accounts, including cash and investment options. You can also pay into multiple ISAs of the same type in each tax year as long as you don’t exceed your annual allowance.

Sheltering your returns from tax

The major appeal of an ISA is that any interest earned, or profits made, are free from UK income tax and capital gains tax (CGT). This provides a valuable tax break for investors, particularly those whose capital gains may exceed the annual CGT allowance which is £3,000 for the current tax year.

Moreover, you won’t pay tax on dividends from shares held in an ISA. Outside an ISA, any dividend income above the annual tax-free threshold of £500 is liable to tax; with basic-rate taxpayers paying 8.75%, higher-rate taxpayers paying 33.75%, and additional-rate taxpayers paying 39.35%.

Interest earned on cash savings held within an ISA are also tax free, irrespective of your tax rate. Outside of an ISA the personal savings allowance (PSA) is limited to £1,000 for basic rate taxpayers, £500 for higher rate taxpayers and zero for additional-rate taxpayers. This makes ISAs particularly appealing to savers in the current relatively high interest rate environment.

Getting started

It is worth noting that you do not need to invest the full amount into an ISA, and most providers will let you start saving with a small lump sum or regular payment.

ISAs are usually very flexible, with many allowing you to withdraw and replace cash in the same tax year without affecting your annual allowance. However, not all ISA providers offer this feature, so it is best to check any restrictions with your provider before you start.

You also have the freedom to transfer your ISA to another provider, whether you’re after a better cash ISA rate or are looking to invest.

Stocks and Shares ISAs

Regular investment into an ISA will enable you to build significant tax-free funds overtime, and there is no limit to the amount of growth that you can make within an ISA. However, as with any investment if you choose a stocks and shares ISA you need to keep in mind that the value of your investments can fall and rise, and you may get back less than you initially invested.

A stocks and shares ISA should be considered a long-term investment of five or more years, and therefore may not be suitable for short term investors.

Junior ISAs

In addition to your own personal ISA allowance, you can invest up to £9,000 in a Junior ISA (JISA) for a child – with both cash and stocks and shares options available. A JISA must be opened by a parent or legal guardian, but anyone (including parents, grandparents, friends, or relatives) can contribute up to the annual limit.

JISAs offer a highly tax-efficient way of establishing savings for your children. However, it should be noted that when your child reaches the age of 16, they can take control of the account, but cannot withdraw the money until they turn 18.

Ready to get started?

ISAs are a great tax efficient way of saving and offer a range of options to suit most needs.

The full array of ISAs on offer can be overwhelming and there are multiple factors to consider ensuring that you pick the right one for you.

If you would like to discuss this, or any aspect of financial advice with one of our Wealth Planners, feel free to email us at hello@successionwealth.co.uk or call us on 0800 051 4659 and we will arrange for someone in your area to contact you.

Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The content was accurate at the time of writing. Whilst information is considered to be true and correct at the date of publication, changes in circumstances, regulation, and legislation after the time of publication may impact on the accuracy of the article.

This information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change and tax implications will be based on your individual circumstances.

The value of your investment(s) and the income derived from it, can go down as well as up and you may not get back the full amount you invested.

FP2024-144. Last reviewed April 2024