ISAs

Every UK resident aged 18 or over has an ISA allowance for each tax year, running from 6 April to the following 5 April. It limits what you pay in, not what your ISA can grow to, so growth never uses up any of it. The allowance does not roll forward. Whatever you have not used by 5 April is gone, and a fresh one starts the next day.

You can split a year’s allowance across different types of ISA, and since April 2024 across more than one ISA of the same type, the Lifetime ISA excepted. The overall limit still applies across the lot.

We have not printed the allowance figure here on purpose. The government has signalled changes to how much of it may be held in cash, so check the figure for the tax year you are in.

Cash ISA

A deposit account inside an ISA wrapper, with interest paid without deduction of UK income tax. Given the personal savings allowance, the benefit is modest on a small balance and matters more for higher rate taxpayers.

Stocks and Shares ISA

Holds funds, investment trusts, shares, gilts and corporate bonds. No UK income tax on the dividends or interest, no capital gains tax on a sale, nothing to declare on a tax return. Expect to leave this money alone for five years or more.

Lifetime ISA

Open to people aged 18 to 39, who can pay in until they are 50. The government adds a bonus of 25% of what you contribute, up to an annual limit inside your overall allowance. The money can go towards a first home up to a set purchase price, or be taken from age 60. Withdraw it for any other reason and a charge applies that can leave you with less than you paid in.

Innovative Finance ISA

Holds peer to peer loans and certain other alternative investments. Your money is lent rather than deposited, it is hard to exit early, and a borrower failing is a real possibility. The compensation scheme does not cover losses of that kind. Separately, the Junior ISA for under 18s has its own allowance.

You can move an ISA between providers, and between types, without losing the tax treatment on what has already built up. The important part is how. Ask the new provider to arrange it. Withdraw the money yourself and pay it in elsewhere and it stops being an ISA the moment it leaves, with the payment in counting against your current allowance.

Money paid in during the current tax year has to transfer in full if it moves at all. Money from earlier years can be transferred in part. Transfers use none of your allowance, though some providers charge an exit fee and a stocks and shares ISA can be out of the market while one completes.

Normally, taking money out of an ISA is a one way trip, and paying the same money back in later counts against that year’s allowance again. A flexible ISA works differently. Where the provider offers flexibility you can withdraw money and replace it in the same tax year without it counting twice, as long as it goes back into the same ISA before 5 April.

Flexibility is a provider choice, not a legal requirement, so two accounts with the same name can behave differently. Cash ISAs are commonly flexible, stocks and shares ISAs less often, Lifetime and Junior ISAs never.

An ISA does not stop dead when the holder dies. It becomes a continuing account of a deceased investor, and the income and gains inside stay sheltered until the earlier of the estate being settled, the account closing, or three years from the date of death.

A surviving husband, wife or civil partner is entitled to an additional permitted subscription, a one off extra allowance on top of their own, equal to the value of the deceased’s ISA either at the date of death or when the account closes, whichever is higher. It applies whether or not the ISA is left to them, and broadly must be used within three years of death, or 180 days after the estate administration finishes if that falls later. Providers do not always point it out, so raise it early. What an ISA does not do is escape inheritance tax, since the value forms part of the estate in the ordinary way.

Our conversations about ISAs are usually less about which provider and more about sequencing, and about whether a couple is using both allowances. Heritage is a small family run firm in Taunton, advising across Somerset and the South West since 2000 and directly authorised by the Financial Conduct Authority under firm reference 624976. Being independent, we look across the market rather than one provider’s range.