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31st
Jan 2019
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The tax rules for ISAs

The tax rules for ISAs

There’s no doubt that the tax advantages of ISAs make them a compelling proposition for savers and investors. But understanding some of the ins and outs of the tax structures will help you decide between the different products available. 

Put simply, Individual Savings Accounts (ISAs) are accounts you never pay tax on. They’re offered by banks, building societies, asset managers and the government-backed National Savings & Investments (NS&I).

The interest you earn doesn’t count towards your Personal Savings Allowance, so if you could be earning a lot of interest, you can protect more of it in an ISA.

ISA earnings can range from 0.65% on an instant-access cash ISA that can be opened with just a £1 deposit, to 8% in a “structured deposit plan” cash ISA or up to 14.51% on a “structured investment plan” stocks and shares ISA.

LIMITS TO HOW MUCH YOU CAN PUT AWAY

Accumulating those earnings tax-free is a considerable benefit, so there’s a limit to how much you can save or invest in a tax-free ISA “wrapper” each year: from the 2017/18 tax year the limit has been £20,000 a year.

You must save or invest before the end of each tax year on 5 April to get the tax-free benefit. And you can’t roll over any unused allowance to the following year.

So if you only put £12,000 into an ISA (or more than one type of ISA) in one year, the following year you can still only save or invest a maximum of £20,000 into ISAs – not £28,000.

TRANSFER TO MAXIMISE EARNINGS

If you want to transfer the balance out of an old ISA account into a higher-paying account, it won’t be counted as part of your current year’s ISA allowance.

Be sure to transfer the balance: don’t withdraw it in cash and then pay it in or you’ll be taking it out of its ISA wrapper and it will be counted as part of your annual £20,000 allowance (unless you have a "flexible" ISA). Instruct your new provider to transfer it over.

An administrative bonus: PAYE taxpayers still don’t have to fill out an annual tax return for their ISAs.

There are five types of ISAs:

Cash ISAs and Help to Buy ISAs

Cash ISAs

You must be 16 or over to open a Cash ISA.

Cash ISAs can be Instant Access, Regular Savings or Fixed-Rate.

Some of the rates on old Cash ISAs don’t compare well with the current best buys so you’d be advised to check the rates and transfer your balance to a new account with a higher rate. But be sure to get your new provider to do the transfer to keep it ISA-compliant.

Save in a Cash ISA

Help to Buy ISAs launched in December 2015 and are for first-time buyers only. They are a type of Cash ISA so you usually can’t hold both in the same tax year, but some providers do offer a “split ISA” package.

The maximum savings limit for Help to Buy ISAeach year is lower: you can save £1,200 in the first month and up to £200 every month after that (= maximum £3,400 in the first year, £2,400 each year after that).

The big advantage of the Help to Buy ISA is that the government will add 25% to your savings – to a maximum of £3,000. So if after four and a half years you’ve saved the maximum the government will match - £12,000 – you will have £15,000 for your home deposit.

Your last chance to open this kind of ISA is 30 November 2019, and the government will pay out the bonuses until December 2030.

Junior ISAs

One Junior ISA per child can be opened by anyone who has parental responsibility for a child under the age of 18.

The maximum contribution limit (2018/19) is £4,260.

The money is tax-free until they turn 18: they can then withdraw it or transfer it to an adult ISA.

Open a Junior ISA

Investment ISAs

You must be 18 or over to open an Investment (or Stocks and Shares) ISA.

Making your investments within an ISA “wrapper” has three tax advantages:

  • No tax on profits: outside of an ISA, any profits above your annual capital gains tax allowance (£11,700 for 2018/19) are taxed at 18% for basic-rate taxpayers, and 28% for higher-rate taxpayers.
  • No tax on interest earned on bonds
  • No tax on dividend income: outside of an ISA , any dividends above your £5,000 annual dividend allowance are taxed at 25% for higher-rate taxpayers, and at 30.56% for additional-rate taxpayers.

Invest in a Stocks and Shares ISA

Peer to Peer ISAs

You must be 18 or over to open a Peer to Peer (or Innovative Finance) ISA.

Peer to Peer ISAs can be riskier than Cash ISAs, but give you a chance to do peer-to-peer lending, lending to businesses and crowdfunding within a tax-free ISA wrapper.

Invest in a Peer to Peer ISA

Lifetime ISAs

You must be over 18 but under 40 to open a Lifetime ISA (LISA).

You can save up to £4,000 a year in a LISA and the government will add 25% on top.

The bonus is paid once you reach the age of 50, and is paid monthly, and you’re paid interest on it.

Save in a Lifetime ISA

Deposit Cash ISAs

ISA Deposit Plan

from IDAD

ISA Option
Maximum Potential Return 8.00% pa or 2.5 x FTSE growth
  • Deposit Taker: Goldman Sachs International Bank
  • Term: Up to 7 years

Why we like it: The previous issue of this plan had already proved popular - this latest release offers the potential for 8.0% p.a. interest, along with the same capital protection you would get with a traditional cash deposit.”

  • Plan can be ended early by Deposit Taker
  • 2% per quarter (8% pa) if plan ends early
  • 2.5 x FTSE 100 Index growth if plan runs full term
  • Capital protected product*
  • Eligible for the Financial Services Compensation Scheme (FSCS)
  • If plan runs full term returns not guaranteed. You may only receive a return of your original capital
  • Minimum investment £10,000
  • If you withdraw your money during the plan you may get back less than you originally invested

Calculate your interest with this plan

Your savings:
£
You could gain:
£0.00 (per tax year)

Important Information: * The return of your initial deposit depends on the ability of the deposit taker (Investec Bank plc) to repay your money. Structured deposits offer you the potential to earn higher returns than you would with a regular savings account. Your returns are based on the performance of an index or commodity. If the investment does not perform well you may receive no income or capital growth, but you can be confident that your capital will be repaid. You have no access to your deposit during the term of the account, typically 3 to 6 years but your original capital will be repaid in full at the end of the term. In the event that the deposit taker is unable to repay your initial investment and any returns stated you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS) depending on your individual circumstances.

Investment Fund Supermarket ISAs

Vitality Stocks & Shares ISA

from Vitality

Allows ISA Transfers
  • Protection Scheme: FSCS
  • Fund Choice: Choose from 6 funds based on risk level or build your own portfolio
  • Invest From: £100 pm or £1,500 single

Why we like it: Vitality Stocks & Shares ISA. Invest in Vitality funds and they will add extra money to your investment every 5 years – on top of returns. This could get you an extra 15% over 25 years. Capital at risk. More Info

Lifetime ISAs

Lifetime ISA

from OneFamily

ISA Option
Allows ISA Transfers
Regular Savings
  • Protection Scheme: FSCS
  • Fund Choice: Choice of two managed funds
  • Invest From: £25 Direct Debit or £250 lump sum payment

Why we like it: Invest towards your first home or retirement with a 25% government bonus - that's an extra £1,000 for every £4,000 you save. Two funds to choose from - a lower risk/return fund designed for the short term (at least 5 years) and a higher risk/return one for longer term saving (at least 10 years). Switch funds anytime, free of charge. Invest from £25 Direct Debit or £250 lump sum. Easy to apply and manage online - at your fingertips 24/7.Covered under the Financial Services Compensation Scheme. Capital at risk.

  • Available to 18-39 year olds. You can continue to pay in until your 50th birthday
  • Invest up to the current tax year limit of £4,000
  • Get a 25% government bonus: For every £4 you invest you receive a £1 bonus
  • Two funds to choose from - a lower risk/return fund designed for the short term (at least 5 years) and a higher risk/return one for longer term saving (at least 10 years)
  • Withdrawals can be made towards the purchase of your first home based in the UK, or for your retirement at age 60
  • Switch funds anytime, free of charge
  • Easy to apply and manage online - at your fingertips 24/7
  • Available to 18-39 year olds
  • If you need to access your money for any other reason, you’ll pay a 25% penalty
  • Simple 1% Annual Management Charge. An additional fund expenses charge of up to 0.3% also applies
Junior ISAs

One Family Junior ISA

from OneFamily

Regular Savings
  • Investment Options: From £10 a month

Apply online and receive a £30 Amazon e-voucher (T&C’s apply – see OneFamily website for details). Choice of two managed investment funds - Family Balanced International Fund or Family Charities Ethical Trust Fund. You choose how much you want to pay in, and when. From £10 to £355 a month up to £4,368 in the 2019/20 tax year. Easy to manage: 24/7 Online Account Management and a friendly UK based call centre. Transfers from cash or stocks and shares Junior ISAs or exisiting child trust funds accepted, with a value of at least £500. Winner of the 2016 Moneyfacts Award for Best Junior ISA Provider.

High Income ISAs

High income ISA ideas:

ISAs Products

Cash ISAs

Fixed Rate & Instant Access ISAs:

Cash ISAs: 

Stocks & Shares ISAs

Types of Stocks and Shares ISA include: 

Stocks and Shares ISAs

Latest News

How much can I pay into an ISA?

21st March 2019

Each tax year, there's a limit set by the government to the amount you can save and invest in ISAs: your “annual ISA allowance”. The allowances are intended to reward savers and encourage us to invest more to support our future retirements, without creating a tax haven that can be taken advantage of by very wealthy individuals who just want to avoid paying tax.

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