ISAs, or Individual Savings Accounts, were introduced in 1999 by HM Treasury as a tax-efficient way for individuals to save and invest.
In this guide, we'll explore the different types of ISAs, contribution limits, and how to make the most of these tax-efficient wrappers.
1. What is an ISA?
An Individual Savings Account (ISA) is a tax-efficient way to save or invest. You don't pay income tax, capital gains tax, or dividend tax on the money in an ISA, making it a powerful tool for growing your savings.
2. Types of ISAs
There are several types of ISAs to suit different financial goals:
Cash ISA: A low-risk option where you don't pay tax on the interest earned. It's ideal for those looking for guaranteed returns without exposure to market risks.
Stocks & Shares ISA: Invest in shares, bonds, or funds with potential for higher returns. While offering greater growth prospects, this ISA comes with higher risk as the value of investments can go down as well as up.
Lifetime ISA (LISA): Designed to help save for a first home or retirement, with the added benefit of a government bonus of up to £1,000 per year. Restrictions apply on when funds can be withdrawn without penalty.
Innovative Finance ISA: Earn interest from peer-to-peer lending platforms. This ISA allows you to lend money to individuals or businesses, offering potentially higher returns but with higher risk compared to a Cash ISA.
Junior ISA (JISA): Tax-free savings account for children under 18. The account must be opened by a parent or guardian, but anyone can contribute to it. Since contributions are for a child under 18, rather than deposited in your own name, the Junior ISA allowance is separate to your own allowance.
3. ISA contribution limits
The annual ISA allowance for the 2023/24 tax year is £20,000. This is the maximum you can contribute across all ISA types, excluding the Junior ISA, which has a separate allowance.
You can split your £20,000 allowance across different types of ISAs, however the maximum you can put into a Lifetime ISA each year is £4,000.
Summary:
Annual ISA Allowance (2023/24): £20,000.
Lifetime ISA Limit: £4,000
Junior ISAs:
In addition to the £20,000 annual ISA allowance, contributions can also be made to a Junior ISA.
The Junior ISA is a tax-free savings account for children under 18, with a separate annual contribution limit of £9,000 for the 2023/24 tax year, which is independent of the adult ISA limit. The funds become accessible to the child when they turn 18.
The Junior ISA allowance applies per child. For example, if someone wanted to contribute to three Junior ISAs (one for each child), they could put in up to £9,000 for each account. This allows a total of £27,000 across the three accounts in a single tax year.
Additional Permitted Subscription (APS):
The APS allows you to continue benefiting from tax-free savings on inherited funds.
If your spouse or civil partner passes away, you may be eligible for an APS, which is an extra ISA allowance on top of your own £20,000 annual limit. This additional allowance equals the value of the deceased partner's ISA at the time of their death.
4. ISA allowance calculator
To help you explore how to effectively use your ISA allowance across various ISA wrappers, we've built a simple-to-use calculator.
ISA allowance remaining:
£20,000
The maximum amount you can put into a cash ISA, stocks & shares ISA and Innovative ISA is £20,000. For a Lifime ISA the maximum is £4,000.
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5. How to maximise your ISA
Make the most of your ISAs by contributing early in the tax year, diversifying your accounts, and considering long-term investments with your Stocks & Shares ISA.