Our experts at DSR Tax Refunds know how hard it is to find good, quality information about HMRC’s tax regulations that is easy to understand, and that’s why we have created these handy guides to tell you everything you need to know. Our aim is to make life easier for our clients and that is why we want to share our expertise with you. You can also call our friendly team on 0330 122 9972 – we’re the tax experts you can trust. Or you can check out our online calculator to see if you could be due a refund.
What are ISAs?
ISAs (Individual Savings Accounts) allow you to build up some savings without having to pay tax on those savings.
For the current tax year, the maximum amount you can save in your ISAs is £20,000.
There are 4 different types of ISA:
- Cash ISAs
- Lifetime ISAs
- Stocks and shares ISAs
- Innovative Finance ISAs
You can put money into one of each kind of ISA each year but the maximum amount you can save is spread among all the ISAs you have.
Who can open an ISA?
Who is entitled to open an ISA depends on the type of ISA in question:
- Cash ISAs: these can be opened by anyone aged 16 or over
- Stocks and Shares/ Innovative Finance ISAs: these can be opened by anyone aged 18 or over
- Lifetime ISAs: these can be opened by anyone over the age of 18 but under 40
To open an ISA, you must be a UK resident or a Crown Servant (such as a diplomat or member of the overseas civil service) or their spouse or civil partner if you are not a UK resident.
ISAs are Individual Savings Accounts, which means that you can’t hold one with or on behalf of someone else. You can get Junior ISAs for children under 18 though.
How do ISAs work?
ISAs allow you to save your money without having to pay any interest on your savings. If your savings are in an ISA, you won’t pay any tax on interest on cash in an ISA, or on income or capital gains from investments in an ISA. This means that if you have to complete a Self Assessment tax return, you don’t need to declare any interest, income or capital gains you get from your ISA.
There are 4 different types of ISA:
- Cash ISAs
- Stocks and shares ISAs
- Innovative finance ISAs
- Lifetime ISAs
Each tax year you can put money into one of each type of ISA, either all in one ISA or split between different types of ISA. You can only put £4,000 each tax year into a Lifetime ISA though. The maximum you can put in your ISAs in any tax year is £20,000.
So, for example, in the current tax year you could save £10,000 in your cash ISA; £4,000 in your Lifetime ISA; £3,000 in a stocks and shares ISA and £3,000 in an innovative finance ISA. This would total your maximum allowance of £20,000. Of course, you could save differing amounts in each type of ISA as long as you only invested a maximum of £4,000 in your Lifetime ISA and the total amount invested in your ISAs didn’t exceed £20,000.
The ISAs don’t close at the end of the tax year – your savings stay in those ISAs on a tax-free basis for as long as you keep the money in the ISA account.
What can you include in a cash ISA?
In your cash ISA, you can include any of the following:
- Savings in bank or building society accounts
- Certain National Savings and Investments (NS&I) products, such as Premium Bonds
What can you include in a stocks and shares ISA?
You can include any of the following in a stocks and shares ISA:
- Government bonds
- Corporate bonds
- Shares in companies
- Unit trusts and investment funds
You can’t transfer any non-ISA shares that you may already own into your ISA, unless they are from an employee share scheme.
What can you include in an innovative finance ISA?
You can include the following investments in an innovative finance ISA:
- ‘Crowdfunding debentures’, which refers to when you invest in a business by buying its debt
- Peer-to-peer loans, which are loans which you make to other people or businesses without using a bank, perhaps by using your personal income.
Any peer-to-peer loans or crowdfunding debentures you already hold can’t be transferred into your innovative finance ISA – they have to be newly made investments.
What can you include in a Lifetime ISA?
Lifetime ISAs can include cash or stocks and shares.
If you’re not sure what you can and can’t include in your ISA or if you are unsure of the tax rules surrounding ISAs, you can call the HMRC ISA helpline on 0300 200 3300 (textphone 0300 200 3319).
How do you open an ISA?
There are a number of financial institutions which offer ISAs. These include:
- Building societies
- Friendly societies
- Credit unions
- Stock brokers
- Crowdfunding companies
- Peer-to-peer lending services
The provider you choose will be able to give you more information about what you need to do to open an ISA with them.
How do you withdraw your money from an ISA?
You are allowed to take your money out of an ISA at any time without losing any of the tax benefits. There may be other rules or charges regarding early withdrawal from your ISA, which will all depend on your ISA provider so you will need to check the terms of the ISA to see whether you will be penalised in any other way.
The rules are different for withdrawing money from a Lifetime ISA. Because these are intended to be long-term investments, you will be penalised for withdrawing money from your Lifetime ISA or transferring it to a different type of ISA before you are 60. This charge will be 25%.
If your ISA is classed as ‘flexible’, you can withdraw money from it during the tax year and then put it back during the same tax year without reducing your current year’s allowance. Your provider will be able to let you know if your ISA is flexible.
Can you transfer your ISA?
You are allowed to transfer your ISA from one ISA provider to another at any time. You can also transfer your savings to a different type of ISA or to the same kind of ISA. However, if you want to transfer money you have invested in your ISA during the current tax year, you have to transfer all of it not just a part of it.
If you want to transfer money you invested in an ISA in a previous tax year, you can choose to transfer as much as you like – whether that is all of it, or only a proportion of it.
However, if you want to transfer cash or assets from a Lifetime ISA to a different type of ISA before you are 60 years old, you will have to pay a withdrawal fee of 25% under the Lifetime ISA rules.
Are there any restrictions on what you can transfer?
If you want to transfer your innovative finance ISA investments, there are restrictions on what you can transfer. You will be able to transfer any cash you have in your innovative finance ISA but you might not be able to transfer any of the other investments held in it.
Your ISA provider will be able to give you information on any restrictions they may have placed on your ISA as well as any charges there may be for transferring your ISA.
How do you transfer your ISA?
If you want to transfer your ISA, you need to contact the ISA provider you wish to transfer to and fill out an ISA transfer form to move your account to the new ISA provider. If you don’t fill in the ISA transfer form, you won’t be allowed to reinvest that part of your tax-free allowance again in that tax year.
ISA transfers shouldn’t take any longer than 15 working days for cash ISAs or cash Lifetime ISAs and 30 working days for all other types of ISA transfer. If your transfer is taking longer than this, you should contact your ISA provider to find out the reason for the delay. If you are unhappy with the response of your ISA provider, you have the right to complain to the Financial Ombudsman Service on 0800 023 4567 (0300 123 9123 for mobiles). Lines are open between 8am and 8pm Mondays to Fridays and 9am to 1pm on Saturday.
What happens to your ISAs if you die or move abroad?
If you move abroad after opening an ISA in the UK, you can’t put any money into it after the tax year in which you move – unless you are a Crown employee working overseas, or their spouse or civil partner. You will still be allowed to keep your ISA open though and you will still get UK tax relief on any of the money and investments held in the ISA.
You need to inform your ISA provider as soon as you stop being a UK resident.
If you return to the UK and become a UK resident again, you will be able to pay into your ISA again.
If you die, your ISAs end on the date of your death. Income Tax and Capital Gains Tax aren’t payable up to that date but your ISA investments will form part of your estate for Inheritance Tax purposes. Your ISA provider can then be instructed to sell the investments in your ISA and then either pay the proceeds to the beneficiary of your estate or person tasked with administering your estate, or to transfer the investments directly to them. Your ISA terms and conditions can tell you how the ISA will be treated after your death.
If your spouse or civil partner died on or before 3rd December 2014, you are allowed to inherit their ISA allowance. This means that as well as your own normal ISA allowance, you can add a tax-free amount up to the value that they held in their ISA when they died.
How can DSR Tax Refunds help?
We aim to make life as simple as possible for our clients and that includes giving you the information you need to make your taxes (and your life) simpler and less stressful. Our team of experts at DSR Tax Refunds are always on hand to help our clients and our excellent standing with HMRC means that we can make sure you don’t fall foul of their regulations, while claiming your maximum tax rebate. We can even take care of all that paperwork and deal with HMRC on your behalf too. Call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.
This page was last updated on 15/09/2020.