When it comes to savings accounts and long-term investments, it can be tricky to know where to begin, especially when you’re just starting out. Even for the most seasoned of savers, the continually changing financial market can sometimes make it feel like it’s hard to keep up with where you’ll get the most ‘bang for your buck’.
Individual Savings Accounts (ISAs) are one of the most popular ways to save here in the UK, with an estimated 22.3 million Brits having one. However, our research shows there are around 390,000* online searches every single month in the UK asking questions about ISAs—from what they are, and how they work, to whether you pay inheritance tax on them.
Finding the answer to your ISA question can be a bit of a minefield. That’s why our Investing experts here at Wealthify has looked at the 10 most searched-for ISA questions, and answered them for you. Check them out below:
- What is an ISA?
- How much can I save in an ISA?
- Do you pay tax on ISA interest?
- How many ISAs can I have?
- What is a Stocks and Shares ISA?
- Does transferring an ISA count as opening a new one?
- Do I pay tax on ISA withdrawals?
- Are ISAs subject to inheritance tax?
- Can you have a joint ISA?
- How to open an ISA
Please note: Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
1. What is an ISA?
You’ll likely hear the term ‘ISA’ mentioned often when you start saving or investing your money, but might find yourself wondering “What is an ISA”?
An ISA is a savings account that helps you to save or invest your money tax-efficiently.
What does ISA stand for? ISA stands for Individual Savings Account.
How do ISA accounts work? UK tax residents can save or invest up to a set amount each tax year (April 6th-April 5th), without having to pay any income or capital gains tax on the interest or profits.
The tax treatment of your savings will depend on your individual circumstances and may change in the future.
2. How much can I save in an ISA?
There’s no limit to how much money you can save or invest in total within your ISA, however, there are yearly limits on how much money you can put in, and this is set by HMRC.
So, how much can you put in an ISA per year? As it stands, during each tax year—which runs from April 6th to April 5th —you have an annual ISA allowance of £20,000, and this can be split across multiple accounts. For example, if you had both a Cash ISA and a Stocks and Shares ISA, you could put £10,000 in one and £10,000 in the other. It doesn’t matter how you split the £20,000 across multiple ISA accounts, you just can’t exceed your annual allowance.
However, it’s worth noting that Lifetime ISAs are capped at £4,000 per tax year, so you’d have £16,000 left of your allowance to hold in a different type of ISA in that instance.
What happens if I go over my ISA allowance? As mentioned, the current ISA limit is set by HMRC. It’s your responsibility to keep track of your ISA contributions and how much of your allowance you’ve used.
If you accidentally exceed your ISA allowance within the tax year, you won’t receive any tax relief on the excess payments. Don’t worry though, if you do exceed your ISA allowance, you can contact HMRC to let them know.
3. Do you pay tax on ISA interest?
Your £20,000 annual ISA allowance is only applicable to the amount of money you deposit into your ISA during the tax year. That’s not to say you won’t have built up more wealth over the years before.
So, is ISA interest tax free? Yes. If you deposit £20,000 within the current tax year but earn a couple thousand of pounds more in interest from previous years, you won’t have to pay any capital gains tax or income tax on your ISA interest.
4.How many ISAs can I have?
There are currently four different types of ISAs in the UK for adults. Stocks and Shares ISAs (aka Investment ISAs), Cash ISAs, Innovative ISAs and Cash ISAs. At Wealthify, we offer Stocks and Shares ISAs and Cash ISAs, but we don’t currently offer Innovative ISAs or Lifetime ISAs.
Even though you can have all four ISAs, you must not exceed your annual £20,000 ISA allowance across them (£4,000 for Lifetime ISAs).
There’s also another ISA, specifically for children, known as a Junior ISA (JISA), and any parent or a legal guardian can open a Junior ISA for children under 18. Money held in JISAs isn’t included in your £20,000 personal allowance, meaning you can save up to an additional £9,000 per child, per tax year for them—tax-free.
5. What is a Stocks and Shares ISA?
While there are four different types of ISA accounts you can open, within those four ISAs, you’ll have the option of investing your money in different ways.
A Stocks and Shares ISA is a tax-efficient investment account, meaning you don’t have to pay any capital gains or income tax on the money you earn on the investments made with your money.
Are Stocks and Shares ISAs good? A Stocks and Shares ISA could provide you with better long-term returns than a Cash ISA, where your return will be based on a fixed or variable interest rate. However, it’s all about deciding what works best for you and your plans for your money.
While Stocks and Shares ISAs could yield better longer-term returns, investments do rise and fall in value, so you could get back less than you put in. Investing is usually considered as something you’d do for 5-10 years or more, as this gives your money the opportunity to ride out any highs or lows of the market.
6. Does transferring an ISA count as opening a new one?
If you’re looking to transfer any of your ISAs from one provider to another, it won’t count as opening a new one as far as using up your annual ISA allowance is concerned.
Since 6th April 2024, the current ISA rules mean you can have and contribute to as many ISAs as you want—so long as you don’t contribute more than your £20,000 ISA allowance across them all.
If you don’t already have another ISA account to transfer your money into, you’ll need to open one with a new provider. But, if you’re looking to transfer multiple ISAs into an existing singular one, make sure that your chosen one accepts transfers.
It's important that you use your provider’s ISA transfer process when transferring your money. If you manually withdraw and deposit it into a different ISA yourself, your money could lose its tax-free status.
7. Do I pay tax on ISA withdrawals?
You don’t have to pay tax on ISA withdrawals. But if you want to withdraw money during the current tax year without reducing your remaining £20,000 ISA allowance, you could consider a ‘flexible’ ISA. To check whether your existing ISA already has this, simply ask your provider or check the terms and conditions of your account.
With a ‘non-flexible’ ISA, if you had already saved or invested your full £20,000 annual allowance, and then withdrew some money, you wouldn’t be able to add any more funds until the next tax year. This is because your allowance would effectively be used up. Having a flexible ISA eliminates this restriction, giving you greater control over your money during the tax year.
It’s also worth checking if your provider will charge a fee for withdrawing your money before doing so.
At Wealthify, our ISAs are flexible, meaning you have the added benefit of being able to withdraw and redeposit funds within the same tax year, without impacting your annual allowance. Just remember to not deposit more than £20,000 across all your ISA types by the end of the tax year.
8. Are ISAs subject to inheritance tax?
When someone dies, typically their ISAs will lose their tax-efficient status. This means their ISA will form part of their estate, and if their estate is liable for inheritance tax, then their ISA will be included in that.
Spouses and civil partners can inherit their deceased partner’s ISA allowance (either the value of what’s in the ISA when they pass away/when the account is closed) and move it into their own ISA.
But, if you’re inheriting an ISA from a parent in the future, it might be worth chatting to them about gifting inheritance whilst they’re alive—especially if their estate would be over the current threshold of £325,000 (40% tax charged on any amount over this).
However, it’s worth noting that you will still be taxed on large gifts if your donor passes away within seven years of giving you the money.
9. Can you have a joint ISA?
While many people across the UK share finances with a spouse or partner, you cannot have a joint ISA account with another person.
This is because the tax benefits available in an ISA are designed for one individual, not two. You can, however, both have ISA accounts set up and benefit individually by each having a £20,000 tax-free allowance and then use the money for a joint purchase if you wish to do so.
10. How to open an ISA
It’s easy to open an ISA account. To get started, all you need to do is apply for an account through your chosen provider, meet the eligibility requirements, and provide some personal details.
To open an ISA, you must be 18 years old and a UK tax resident.
For Lifetime ISAs, the rules are slightly different: you must open and make your first payment before you turn 40 years old, and you can only deposit into one until you are 49.
With Wealthify you can start your tax-free saving or investing journey by opening an ISA today. Whether you’re looking to try our award-winning Flexible Stocks and Shares ISA, or our new easy-access Cash ISA, you can start investing or saving in just three simple steps. For more information, visit our dedicated pages below:
Please remember the value of your investments can go down as well as up, and you could get back less than invested. Past performance is not a reliable indicator of future results.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
