As the end of the tax year moves closer, Gill Philpott our Tax and Trusts Specialist joins us for an informative podcast about ISAs.
Gill answers the key questions we frequently receive from clients about investing in an ISA and why it’s important to make sure you top-up before 5th April 2022.
Have you made full use of your tax-free ISA allowance?
If you haven't already, there’s still time to invest up to £20,000 into an ISA in this tax year (2021/2022), if you act now. If you’re thinking of making a contribution, please contact your financial adviser directly, or call us on 0345 475 7500, as soon as possible and before 28th February 2022. We’re here to help.
Frequently asked questions
What is an ISA?
ISA stands for Individual Savings Accounts (ISAs)
They were first introduced in the UK in April 1999, as a tax efficient personal saving scheme.
What types of ISAs are available?
There are 4 main types of ISA:
The funds are held in cash and the providers pay variable amounts of interest.
Stocks and shares ISAs
This type of ISA enables investment into, for example, shares in companies, unit trusts and investment funds, corporate bonds and government bonds.
You can use a lifetime ISA to buy your first home or save for later life. You must be 18 or over but under 40 to open a Lifetime ISA. Investment can be into cash or stocks and shares.
You can put in up to £4,000 each year, until you're 50. The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.
A Junior ISA is a long-term savings account set up by a parent or guardian with a Junior ISA provider, specifically for their child's future. Only the child can access the money, and only once they turn 18. Although the account needs to be set up by a parent or guardian anyone can contribute. The contribution limit is £9,000 per child this tax year (2021/22), this will not eat into your own ISA contribution limit. (Making gifts of this size can have inheritance tax implications.)
How much money can I put into an ISA?
For the 2021/22 tax year, the maximum ISA allowance remains at £20,000. You can choose to invest your money in one type of ISA account, or you can split the allowance across some or all of the other types available.
You can only pay £4,000 into your Lifetime ISA in a tax year, this means if the full £4,000 is put into the lifetime ISA £16,000 is available for contributing to your other ISA accounts.
The tax year runs from 6 April to 5 April and your allowance re-sets at the start of each year, so if the contribution is not paid in by 5 April the years allowance is lost.
What is the minimum to open an ISA?
Many cash ISAs can be opened with a minimum investment of just £1.
With a stocks and shares ISA, most funds will accept contributions starting from either £25 or £50.
Can I withdraw money from an ISA?
You can take your money out of an Individual Savings Account (ISA) at any time but check the terms of your ISA to see if there are any rules or charges for making withdrawals.
There are different, more restrictive rules for taking your money out of a Lifetime ISA and the Innovative Finance ISA.
If your ISA is ‘flexible’, you can take out cash then put it back in during the same tax year without reducing your current year’s allowance. Your provider can tell you if your ISA is flexible.
Your ISA personal allowance is £20,000 and you invest £10,000 into an ISA during the 2021 to 2022 tax year. You then take out £3,000.
The amount you can now put in during the same tax year is:
£13,000 if your ISA is flexible (the remaining allowance of £10,000 plus the £3,000 you took out)
£10,000 if your ISA is not flexible (just the remaining allowance).
What are the tax benefits of an ISA?
You pay no Income Tax on the interest or dividends you receive from an ISA and any profits from investments are free of Capital Gains Tax.
What happens to my ISA if I die?
When you die, your ISA will end when your executor closes the account. Otherwise, your ISA provider will close your ISA 3 years and 1 day after you die.
There will be no Income Tax or Capital Gains Tax to pay up to that date, but ISA investments will form part of your estate for Inheritance Tax purposes.
For married couples and civil partners, the survivor can inherit the deceased spouse’s or civil partner's ISA savings and maintain their tax-efficient status, under the Additional Permitted Subscription (ASP) rules.
Why would I want an ISA compared to other types of investments?
There are a number of advantages associated with an ISA:
- With an ISA, any interest you earn from cash savings or investment gains you make are tax free.
- You don’t have to declare ISAs in your tax return.
- Tax free withdrawals can be made at any time, there is no minimum holding period.
- You can transfer your plan between providers without losing your accrued ISA status
- Income from an ISA is not taken into account for age-related personal allowances.
- No age restrictions (but Junior ISA rules apply below age 18).
- ISA status can be inherited by a spouse or civil partner.
- You can choose from a wide range of investments including cash and stocks and shares.
- There is no upper limit on the amount that can be held in an ISA over time from the yearly contributions and growth.