The 2024/25 tax year-end is fast approaching, so it’s the perfect time to review your Individual Savings Account (ISA) and ensure you’re taking full advantage of your tax-free allowance. You still have time to maximise your contributions, use all your allowance, explore your options, and consult your financial adviser to ensure you’re on track. But you need to be quick!
If you are new to ISAs they can initially seem confusing! Here is a clear guide to ISA allowances and who qualifies for each type.
What is an ISA?
An ISA (Individual Savings Account) acts as a “wrapper” around your investments – whether cash, stocks, or investment funds, allowing them to grow free from tax on interest, income, or capital gains. It’s important to note that ISAs are individual accounts, meaning, they cannot be shared between you and a partner. You each get your own separate ISA allowance. You must be 18 or over to open any type of ISA.
A Junior ISA is opened by somebody deemed to be the person responsible for the child (a parent or legal guardian), and this responsible adult must be over 18 at the time the ISA is opened.
Types of ISAs
There are several different types of ISAs, each designed for specific saving or investment goals:
Cash ISA
Cash ISAs are great for those looking to keep their savings in a secure environment while earning tax-free interest. They offer easy access to your funds and can be opened from age 16. Cash ISAs are a tax-efficient way to build an emergency fund. However, keep in mind that cash savings typically yield lower returns. Holding too much cash in your portfolio could slow overall growth.
Stocks and Shares ISA
Also known as Investment ISAs, Stocks and Shares ISAs are typically used for medium to long-term savings, such as retirement funds. These accounts invest in equities or investment funds, offering the potential for higher returns. You must be 18 or older to open one. However, do keep in mind that investment values can fluctuate, and you may get back less than you originally invested.
Lifetime ISAs (LISA)
LISAs are designed for first-time homebuyers and retirement savings. You can choose to hold cash, stocks and shares, or a combination of the two in your LISA. If you’re aged 18 to 39, you can open a Lifetime ISA and contribute up to £4,000 per year. The government will add a 25% bonus on top of your contributions, so a £4,000 contribution can get you an extra £1,000. However, if you withdraw money for any reason other than buying a first home or after turning 60, you’ll face a 25% penalty.
Innovative Finance ISAs (IFISA)
Innovative Finance ISAs are a new option, they allow you to invest in peer-to-peer lending platforms, where your money is lent to individuals or small businesses. This can offer potentially higher returns but comes with risks – unlike traditional savings, your capital is not protected by the Financial Services Compensation Scheme (FSCS).
As with other ISAs, you must be 18 or over to open an IFISA, and it is important to understand the risks before investing. Please remember this type of ISA is high risk and needs careful consideration and advice from a professional before use.
Junior ISA
A Junior ISA is a tax-free savings account for children under 18 who don’t qualify for a Child Trust Fund. There are Cash Junior ISAs and Stocks and Shares Junior ISAs, and children can hold one or both types. For the 2024/25 tax year, the contribution limit for Junior ISAs is £9,000. Children take control of their Junior ISA at age 16 but cannot access the funds until they turn 18. It is therefore vitally important to educate your child as to the value of money and how this type of investment works before they reach age 18.
Help to Buy ISA
Note: Help to Buy ISAs are no longer available to new savers. If you opened one before November 2019, you can still contribute until November 2029, and claim the 25% government bonus until November 2030.
Your ISA Allowance and Contributions
The total ISA allowance for the 2024/25 tax year is £20,000. You can divide this between different types of ISAs, such as a Cash ISA, Stocks and Shares ISA, Lifetime ISA, or Innovative Finance ISA, but you can’t exceed the £20,000 limit across all accounts.
- The Lifetime ISA has a cap of £4,000, which is counted as part of the £20,000 total.
- If your ISA is ‘flexible’, you can withdraw and reinvest the same amount within the same tax year without it counting toward your limit.
Important: Your ISA allowance is annual, so any unused allowance doesn’t carry over into the next tax year, so it’s essential to make the most of it before April 5th.
Can I open multiple ISAs?
A big change from April 2024 is that you can now open multiple ISAs at the same time in one tax year, as long as you don’t exceed the individual limit and stay within your £20,000 (for over 18s). You can combine different types of ISAs. For instance, you could, if you qualify, contribute to a LISA for £4,000 and two different stocks and shares ISAs totalling £16,000 in one tax year. Once you have been using ISAs for your savings and investments for several years, you will have a collection of ISAs from different tax years.
What Happens to My ISA When I Die?
If you pass away, your ISA benefits can be transferred to your spouse or civil partner. They’ll receive an extra “Additional Permitted Subscription” (APS), which is the value of your ISA at the time of your death. This allows your partner to use an additional ISA allowance, over and above their own annual limit.
Maximising Your ISA
ISAs were introduced in 1999 with a £7,000 annual allowance. Today, the limit stands at £20,000, and making full use of this allowance each year can significantly boost your savings. Over time, ISAs offer a powerful tax-free way to accumulate wealth.
Transferring and Amalgamating ISAs
You can transfer ISAs between providers and types, but always check with your provider for the specific process. Some key points:
- Cash ISAs and Stocks and Shares ISAs: You can transfer both – full or partial amounts to a new provider or another type of ISA.
- Innovative Finance ISAs: Transfers are allowed but may have restrictions depending on the provider.
- Lifetime ISAs: You can also transfer Lifetime ISAs to other types of ISAs however they would be treated as a withdrawal from the Lifetime ISA and are subject to a 25% withdrawal charge unless:
– the transfer happens after the investor’s 60th birthday
– the investor has declared that they have a terminal illness
Tip: Before transferring funds, it’s wise to consult a financial adviser to ensure you don’t lose tax benefits or face unexpected costs.
Final thoughts
With so many ISA options available, it’s natural to feel overwhelmed. However, ISAs play a key role in a strong financial strategy by offering tax-free growth on your savings. If the different types and rules seem complex, a financial professional can help you choose the best option for your long-term goals.
The sooner you start investing in ISAs, the greater the potential for growth over time. A well-built ISA balance can be a valuable step toward a more secure financial future.
Tax is dependent on your own circumstances and personal situation, and is subject to changes based on UK legislation and taxation regime. This article is based on our understanding of current legislation.
Please be aware that the value of investments linked to the stock market may rise or fall depending on market conditions and that you may not always recoup your initial investment. Past performance should not be seen as an indication of future returns.
Please note: This article was originally published on 7th March 2022. For accuracy purposes, this has been updated in March 2025.