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- What is an ISA? How do ISAs work? | Savings Accounts
What is an ISA?
An ISA lets you earn interest without paying any income tax, but you are limited to how much you can put in. Here is everything you need to know to get started.
Investment ISAs put your capital at risk, and you may get back less than you originally invested.
How do ISAs work?
An ISA is a tax free savings account, which stands for individual savings account (ISA).
Every tax year you have an ISA allowance in the UK that lets you save or invest money up to a certain amount without paying tax on your returns.
Your ISA allowance for the 2020/21 tax year is £20,000. The tax year runs from the 6th April to the 5th April the following year.
This means you have until the 5th April 2021 to use up your ISA allowance for this tax year.
When a new tax year starts you will have a brand new ISA allowance. This happens on the first day of every new tax year.
If you do not use all of your ISA allowance before the end of the tax year it will be gone. You cannot carry forward any unused ISA allowance from one year to the next.
How much tax do you save with ISAs?
You will not pay any income tax on money saved in an ISA, as long as you do not pay in more than your allowance each tax year.
This applies to not only basic rate taxpayers, but higher rate and additional rate tax payers too, for example:
| Type of taxpayer | Income tax on savings | Income tax on ISAs |
|---|---|---|
| Basic rate | 20%* | 0% |
| Higher rate | 40%* | 0% |
| Additional rate | 45% | 0% |
*After exceeding personal savings allowance.
Who can open an ISA?
To open one, you need to:
Be 16 or older (18 for stocks and shares ISA)*
Be a resident in the UK
Have a national insurance number
* Except for Junior ISAs.
An ISA can only be held in one person's name. It is not possible to have an ISA in joint names.
What happens if you go over your tax free allowance?
Your savings provider should reject any deposit that pushes you over your annual allowance.
If this does not happen and you manage to go over your allowance accidentally, HMRC will contact you to attempt to correct your ISA records.
What types of ISA are there?
There are two main types of ISA: a cash ISA and a stocks and shares ISA. There are also some specialist ISAs to choose from. Here is how they work:
Cash ISAs
Instant access: You can withdraw and deposit funds* as often as you want
Fixed term: You deposit money and tie it up for a fixed term
* Up to your full ISA allowance
Stocks and shares ISAs
These are stocks and shares investment accounts which use your ISA allowance as a wrapper to make them tax efficient.
Your money is at risk but could give you a better return than cash ISAs. Find out about how stocks and shares ISAs work here.
Specialist ISAs
Junior ISA: For children only, read this guide for further information
Lifetime ISA: For adults under 40 saving for retirement or to buy their first home, read this guide to find out more
Innovative finance ISA: P2P savings that uses an ISA wrapper to make it tax free.
How do you open an ISA?
You can open one in a branch, online, by post or over the phone, depending on the ISA you choose.
You will need to put some money in to start your new ISA, this minimum amount can vary from £1 up to £1,000.
You will need to give your personal details when you apply, including your:
Name
Address
National insurance number
Signature (which you will need to date)
You will also need to read an ISA declaration, which tells you how the ISA allowance and rules work.
Make sure you read this information before signing the application form as it may include restrictions like penalties for withdrawing.
What happens after you open an ISA?
You will be given a passbook, certificate or an online statement to view after you open your ISA.
For branch based accounts, you will need your passbook or certificate to make any withdrawals or changes to your account. You can usually manage online based ISAs through your online banking.
How many ISAs can you have?
You can only pay into one cash ISA, one stocks and shares ISA and one innovative finance ISA in each tax year.
Did you know?
Some providers offer higher interest rates for ISAs which only let you pay in your ISA allowance for that tax year.
However, you can pay into a new cash, stocks and shares or innovative finance ISA every tax year, which can leave you with multiple ISA accounts.
For example; if you had paid into a new cash ISA every year since the 2008/09 tax year, you would have nine different cash ISA accounts today.
Are there any exceptions?
Some banks and building societies will let you pay into a second ISA within the same tax year, but only if both ISAs are held with them - this is usually alongside specialist ISAs, like the Help to Buy ISA.
Check with each provider to find out if you can do this.
Can you withdraw money from you ISA and put the money back later?
This depends if the terms and conditions of your ISA say that your account is flexible or not.
If your ISA is flexible
You can withdraw money and pay it back in during the same tax year without it affecting your ISA allowance.
You can also withdraw any ISA money you have from previous tax years, and have until the end of the tax year to pay it back in.
For example, if you had £20,000 in an ISA from previous tax years and wanted to withdraw £15,000, you have until April 5th to pay the £15,000 back, in addition to your ISA allowance for the current year.
If you decide to transfer your ISA to another provider before paying your money back in, any deposits made will count towards your ISA allowance.
If your ISA is not flexible
Any money you try to put back in will count towards your remaining ISA allowance.
If you have exceeded the allowance for the tax year, the payment will be rejected.
Your money will lose its tax free status if you withdraw it and pay it into a normal savings account.
Can you transfer an ISA?
Yes, you can move an ISA to a new provider if they offer a better interest rate; this is called an ISA transfer in.
If you move your ISA by withdrawing cash, cheque or doing a bank transfer you will lose its ISA status.
Transferring an ISA means you do not lose the ISA allowance you had already built up in an old ISA.
If you want to transfer your ISA to another with the same provider, you can ask to do an ISA consolidation, which lets you combine ISAs together into a new or existing ISA.
Do all ISAs accept transfers?
No, so make sure you check with the ISA provider before you apply otherwise you could end up with separate ISAs.
What happens to your ISA if you die?
When your estate is being administered following your death, your ISA will lose its tax free status, and your estate will be liable to pay income tax on any interest added to your ISA.
Your spouse or civil partner can move your ISA into their name if you died on or after 3rd December 2014. This is known as an additional permitted subscription, and applies to both cash and stocks and shares ISAs.
For example, if you saved £30,000 into an ISA, your spouse could inherit this amount and put it into an ISA in their name, in addition to their ISA allowance of £20,000.
If you leave your ISA to somebody else in your will, such as your son or daughter, your spouse or civil partner will still benefit from the £20,000 additional ISA allowance.
Here is more information on additional permitted subscription
This article is designed to offer you impartial guidance as to your options and what they might mean, but the decision on which product to take out is yours.
FAQs
Yes, ISAs are protected under the Financial Services Compensation Scheme (FSCS). This protects your savings up to £85,000 per financial provider.
Ask your ISA provider. They will know how much you have saved into your ISA in the current tax year. You can do this in branch, over the phone or online.
You will be taxed on any money which exceeds your annual ISA allowance. If you think you have gone over your limit this tax year contact HMRC for help.
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