ISAs (Individual Savings Accounts) were introduced by the UK government in 1999. They offer UK Residents an opportunity to save or invest – tax free – through a range of ISA products.
In this guide, we’ll help you to understand how Investment ISAs work, what your options are and how you can save or invest in them. Once completed, you’ll know all this:
- What is an ISA?
- Your Individual ISA allowance
- The types of ISAs available to you
- Cash ISAs
- Self-Select Investment ISAs
- Junior stocks and shares ISAs
- Lifetime ISAs
- Help to Buy ISAs
- What can I invest in with investment ISAs?
- Choosing your investment ISA provider
- Transferring an ISA
What is an ISA?
An ISA or Individual Savings Account is a tax-free way for UK Residents to save or invest their money through a bank, building society, stockbroker or fund supermarket. The ISA works as a wrapper, where individuals can put a range of different savings or investments inside it, all benefiting from tax-free growth.
Your Individual ISA allowance
In the current tax period (2017/2018) each individual UK resident is entitled to save or invest up to £20,000, or £40,000 per couple, until 5th April 2018. After this cut-off date, any new contributions will go towards the new 2018/19 period. This means that where there is money available to save and invest, it is best to act before the end of the current tax period so as to maximise your allowance for the next period.
It is important to note that there are a number of additional ISA products available that enable UK residents to save or invest further amounts through the form of a Lifetime ISA, Help to Buy ISA and Junior ISA. We’ll discuss these additional products and how they work with an Individual ISA allowance below.
Types of ISAs
There’s a range of ISA products available for UK Residents. We’ll explain each product, how much you can save or invest, and who will benefit from that ISA. In addition, we’ve put together a table below to give you a snapshot of the options that are available to you.
|Cash ISAs||£20,000||Banks, Building Societies|
|Investment ISAs||£20,000||Fund supermarkets, stockbrokers|
|Junior ISAs||£4,128||Banks, Building Societies, Fund supermarkets, stockbrokers|
|Lifetime ISAs||£4,000||25%||Banks, Building Societies, Fund supermarkets, stockbrokers|
|Help to Buy ISAs||£3,200||25%||Banks, Building Societies|
|Innovative Finance ISAs||£20,000||Peer-to-peer lending firms|
UK Residents can save up to £20,000 this current tax year through a Cash ISA. Typically, you will open a Cash ISA through a Bank or Building society and receive compounding interest on your savings. It is beneficial to research your Cash ISA provider as interest rates can be varied and make sure that you understand the process involved in transferring your Cash ISA to find more favourable rates.
All transfers should be made through your new Cash ISA provider. Should you remove funds, they will no longer be secured within an ISA wrapper and you will lose the tax free benefits.
In periods of low interest rates, a Cash ISA will typically earn less interest than the rate of inflation. Savers should be aware that in these times, the value of their savings is in effect falling.
For example: If the rate of inflation is 3%, and you are earning 1.5% from your cash ISA, you will be losing money at the rate of 1.5% per year.
Self-Select Investment ISAs
Self-Select Investment ISAs are an investment alternative to a Cash ISA, into which you can invest your full £20,000 ISA allowance this financial year, completely tax free. A Self-Select ISA will provide you with the opportunity to invest in a wide range of UK and international share markets, active funds (also known as Unit Trusts or OEICS) or Investment Trusts, and tracker funds known as Exchange Traded Funds. You can also buy corporate bonds listed on recognised exchanges, and bonds issued by the UK or Eurozone governments.
Any capital growth earned, that’s the increase in value of the shares you hold, from investments you hold within a Self-Select ISA will be exempt from tax. For the current ISA period, you will also be able to benefit from tax free Dividend income up to the value of £5,000. However, this will reduce to £2,000 from 2018.
Investors who are planning to grow their investments over the longer term can take advantage of compounding through tax free dividend re-investment – a valuable tool for those planning to grow their wealth over time.
It is important to note that investments can result in capital loss. While over the longer term, the financial markets historically outperform savings accounts, volatility can result in values going down as well as up.
Typically, you will open a Self-Select Investment ISA through a stockbroker or fund platform. You can find our comprehensive Stocks and Shares ISA comparison here.
Junior stocks and shares ISAs
In addition to the Individual ISA allowance, it is also possible for parents or guardians to place up to £4,128 for each child per tax year into a Junior Stocks and Shares ISA or Junior Cash ISA. These Junior ISAs behave in exactly the same way as an Individual ISA up until their maturity, when the child reaches 18.
At the age of 18, the child will have the option to cash in their Junior ISA or transfer it into an Individual ISA, tax free.
It is important to note that while parents or guardians can put money into a Junior ISA, they cannot, at any time, take out any of the money invested. While the adult maintains control over how the money is invested, the child is the sole recipient of the Junior ISA once it reaches maturity on their 18th birthday.
If you are a UK national and you are under the age of 40, you are able to benefit from the Lifetime ISA, launched on 6th April 2017. You’ll be able to save up to £4,000 tax free in your Lifetime ISA, which is in addition to your full ISA allowance, while the government will reward you by paying £1 into your account for every £4 that you deposit. That’s a return of 25% before you even begin to think about investing that money.
What’s more, if you are saving with a partner, that’s up to £10,000 worth of savings tax free each year from just £8,000 deposited.
You’ll be able to choose whether to open a savings-based Lifetime ISA, with fixed interest rates, or an investment-based Lifetime ISA, where you can choose to invest in a range of shares, funds and bonds.
Bear in mind there are some considerations you should be mindful of before you choose an investment based ISA. our Lifetime ISA explained article will help you to make an informed decision.
Help to Buy ISAs
If you are saving to buy your first home, in addition to your full Individual ISA allowance, you can save up to an additional £3,200 through a Help to Buy ISA and the UK Government will help to boost your savings by 25%. For every £200 you save, the Government will provide you with a bonus of £50. The maximum government bonus you can receive is £3,000.
Based on the Cash ISA, a Help to Buy ISA will provide you with a fixed interest rate from a range of banks, building societies and credit unions.
The Help to Buy ISA scheme is available to anyone aged 16 and over who has not purchased their first property. However, the Help to Buy ISA will not be available to new account holders from December 2019, although existing account holders will be able to continue paying into this scheme until 2029.
Savers will be able to deposit up to £200 each month into a Help to Buy ISA and can deposit a first month lump sum of up to £1200. The Government will pay out a minimum bonus of £400 which means that you’ll need to have saved at least £1,600 into your Help to Buy ISA before you can claim your bonus.
The maximum bonus the Government will pay out is £3,000 which means you’ll need to have saved at least £12,000 to receive this.
You’ll receive your Government bonus when you are close to the purchase of your first home. You will need to instruct your solicitor or conveyancer to apply for your government bonus. Once they receive the government bonus, it will be added to the money you are putting towards your first home.
What can I invest in with investment ISAs?
Investment ISAs give you access to a wide range of international share markets, covering potentially over 9000 shares. You can buy and sell shares issued by companies on any recognised exchange in the world.
You’ll also have access to listed investment trusts, investment funds and Exchange-traded funds or ETFs. Between them they can provide access to a wider range of companies and sectors, including overseas companies, commercial property, commodities, currencies and infrastructure.
You can also buy corporate bonds listed on recognised exchanges, and bonds issued by the UK government or Eurozone governments.
There are some securities you can’t buy within Investment ISAs. Funds and ETFs that do not have UK reporting status are not eligible. You can still buy them, but they would become subject to capital gains tax and stamp duty and would automatically sit outside your ISA allowance. In addition, small cap companies and companies listed on AIM are not eligible within Investment ISAs.
Choosing your investment ISA provider
Ultimately much depends on what you want to use your Investment ISA for. The widest range of securities and funds is always a good starting point but it is also important to check out a provider’s fees, including how much you would be charged per transaction and any annual administration and custody fees that might apply.
For investors that are only planning to buy and hold a few funds, execution fees (the fees you are charged every time you buy or sell something in your ISA) will be less of an issue, but don’t forget that funds also apply an annual management fee and frequently additional fees on top of that. If a fund is only going to pass on a 5% return in a year, you don’t want to see 2% go back to the manager in costs.
Before opening an account, do be sure that your provider is going to give you access to the markets you want, with no strings attached. If you plan to do a lot of trading on overseas markets, be sure you are completely clear what the fees will be for doing so, as they can be higher than for UK share trading.
You can find our comprehensive Stocks and Shares ISA comparison here.
Transferring Investment ISAs
There is a process you’ll need to follow in order to preserve you tax-free ISA status when you transfer your ISA. It is important that the money you have within your ISA is kept within the ISA wrapper throughout the transfer process. You’ll need to contact your new Investment ISA provider with the details of your current ISA account and they will manage the transfer on your behalf.
Under no circumstances should you remove the funds from your existing ISA account yourself in order to make a transfer. Doing so would remove your funds from the ISA wrapper and the security of its tax-free status.
Typically, there are no fees when you transfer a Cash ISA. However, Stocks and Share Investment ISAs will carry a wide range of fees depending on the provider. Some providers will charge a single fee for an account closure, while others may charge for the closure of each fund held within your Investment ISA. It is important that you do your research before committing funds.