Individual Savings Accounts (ISAs)
ISAs were introduced on 6 April 1999, replacing the earlier Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs). Interest on cash held in an ISA, including Stocks & Shares ISAs, is not subject to income tax. Dividends are not subject to additional tax, interest on bonds is not taxed, and capital gains are not taxed (although capital losses cannot be used to offset other gains).
There is no need to report interest or other income, capital gains or trades to HMRC, as it is not taxable income.
There are several types of ISAs on the market:
- Stocks & Shares ISA
- Help to Buy ISA
- Lifetime ISA
- Innovative Finance ISA
- Junior ISA
- Cash ISA
A Stocks & Shares ISA invests in qualifying investments such as OEICs/Unit Trusts, Investment Trusts, listed company shares, Government and Corporate Bonds. The current subscription limit is £20,000 for the 2023/24 tax year.
Innovative Finance ISAs were introduced from April 2016. They are similar to Cash and Stocks & Shares ISAs but designed to be used for ‘peer-to-peer’ lending investments. The current subscription limit is £20,000 for the 2023/24 tax year.
A Help to Buy ISA is a form of Cash ISA that receives a government bonus if the money is used in paying the deposit on a first home purchase. The government will add 25% to your savings, up to a maximum of £3,000 on savings of £12,000. The Lifetime ISA introduced in 2017 has replaced the Help to Buy ISA and no new ones are available.
Lifetime ISAs were introduced from April 2017 as a more flexible way to save for both a home purchase and retirement. Only those aged 18 to 40 can open a new account. At the end of the tax year or if used for a house purchase, a 25% addition on contributions of up to £4,000 a year will be made by the Government into the account before age 50 is reached. The £4,000 allowance is part of the overall ISA annual allowance, not in addition to it.
Junior ISAs were introduced in November 2011. At age 18 the JISA converts to an adult ISA. JISAs are available in both cash and stocks & shares types. Money cannot be withdrawn until age 18. A child can open their own account from age 16, otherwise a person with parental responsibility can do it. The current subscription limit is £9,000 for the 2023/24 tax year.
A Cash ISA is an account which enjoys tax-free status and is covered under the Financial Services Compensation Scheme (FSCS) up to £85,000. They are normally offered by banks and building societies but investment firms can also offer them. The current subscription limit is £20,000 for the 2023/24 tax year.