What is an ISA allowance?
Your ISA allowance is the maximum amount you can shelter from tax within an ISA during any one tax year, which runs from 6 April to 5 April. Once the new tax year starts, you get a new ISA allowance – so any unused allowance from the previous year goes to waste.
It’s important to know how much you’ll be able to save up to each tax year in an ISA, so you can maximise your tax-free savings. It’s also best to invest at the start of the year so you benefit from a full year’s interest. For an ISA paying 1.5%, that’s £300 on the full £20,000.
However also consider that ISA interest rates are currently relatively low, so it’s also worth thinking about the gains you might make on other taxable savings accounts, and whether the ISA tax-free benefits are significant enough.
There are no rules about how you split your allowance between the different ISA types, as long as the total doesn’t exceed £20,000. You could, for example, put £6,000 into a cash ISA, £4,000 into a Lifetime ISA, and another £10,000 into a stocks and shares ISA.
What is the 2020/21 ISA allowance?
The total amount you can save or invest into your ISAs between 6 April 2020 and 5 April 2021 is £20,000. You can invest the whole amount in one ISA, or split it between several.
Lifetime ISAs work differently in that you can only save up to £4,000 a year for the term – this comes out of your £20,000 allowance.
What are the different kinds of ISA?
There are six main types of ISA:
- Cash ISAs work in the same way as standard savings accounts, except the interest you earn is tax-free. You can choose between easy-access, variable-rate ISAs and fixed-rate accounts that often require you to lock away your savings for at least a year
- Help to Buy ISAs are cash ISAs designed to help first-time buyers save up a deposit to buy a home. They are now closed to new savers, but if you have one you can keep saving up to £200 a month into your account
- Stocks and shares ISAs allow you to invest in shares, bonds, and investment funds made up of shares, bonds, or both
- A lifetime ISA allows you to save or invest up to £4,000 of your annual ISA allowance – either as a lump sum or via regular payments. The government adds a 25% bonus at the end of every tax year until you reach the age of 50, but you can only keep this if you use your savings to buy a property or wait until you are at least 60 years old
- With innovative finance ISAs, you can earn tax-free returns on different types of investments, such as peer-to-peer lending or crowdfunding campaigns. As these are paid in interest, you pay no tax on what you earn
- Junior ISAs (JISAs) work in a similar way to adult accounts, except they’re specifically for under 18s
What are the tax benefits of using my ISA allowance?
There are various tax benefits linked to ISAs, depending on the type of ISA you choose. With a cash ISA, you don’t pay tax on the interest you earn. So if you open an account paying an interest rate of 1%, you could earn up to £200 tax free in one year.
That’s on top of the Personal Savings Allowance (PSA), which allows basic-rate taxpayers (who earn up to £50,000) to earn £1,000 of savings interest a year tax-free.
For higher-rate taxpayers earning between £50,001 and £150,000, the PSA falls to £500 a year, while additional-rate taxpayers on £150,001 or more don’t get it at all.
The three main tax benefits of stocks and shares ISAs are:
- Paying no capital gains tax on profits from share price rises
- Paying no tax on any interest earned on bonds
- Paying no tax on any income from dividends
If you invest outside an ISA, you can earn up to £12,300 (for 2020/21) in capital gains before paying tax on them. You also get a £2,000 dividend income allowance.
How many ISAs can I have?
You can only open one cash ISA every year. But you can also open one Lifetime ISA, one stocks & shares ISA, and one innovative finance ISA – all in the same tax year. How much you invest in each is up to you – as long as you invest no more than £20,000 in total – and you can open them with one provider or several different companies.
You can also have separate ISAs from previous tax years, as long as you don’t pay into them and your new account during the same tax year.
Should I open more than one ISA?
Splitting your ISA allowance between different types of accounts can be a good way to reduce the risks involved in investing – and take advantage of the best offers for your needs.
The Lifetime ISA, for example, is aimed at people saving for retirement or towards buying a home. If you use it for anything else, you’ll miss out on the 25% bonus from the government. You might consider keeping some savings in a cash ISA to which you have easy access, while putting the rest towards longer-term goals in a stocks and shares ISA.
Whatever type of ISA you want, you can compare hundreds of different ISA deals in just a few moments with MoneySuperMarket.
What happens if I take money out of my ISA?
You can take money out of your ISA at any time, but any money invested and withdrawn will count towards your annual ISA allowance. So if you put £20,000 into a cash ISA and then withdraw £2,000, you won’t be able to pay in any more money until the next tax year starts – unless you choose a flexible ISA. With a fixed-rate cash ISA, you may also have to pay a fee to access your money before the fixed-rate period ends.
If you want to switch ISA providers, it’s important to arrange a transfer rather than withdrawing the money. Once money is withdrawn from your ISA it can only be paid back in up to your current tax year’s allowance. So even if you’ve built up an ISA fund of £50,000, if you withdraw it you’ll only be able to pay £20,000 back this tax year.
Do I have to use my full ISA allowance?
You don’t have to use your full ISA allowance each tax year, but you’ll lose it if you don’t use it. For example, if you put £10,000 into a stocks and shares ISA and £5,000 into a cash ISA, you’ll only be able to claim ISA tax advantages on £15,000, rather than the £20,000 available under ISA rules 2020/21.
You can’t roll the extra £5,000 over into the next year, so any extra cash you save into an ISA after 5 April 2021 will count towards your allowance for the 2021/22 tax year. But it doesn’t matter if you can’t spare £20,000 to max out your 2020/21 ISA allowance. Just save as much as you can.
If you’re a basic-rate or higher-rate taxpayer, you may also find a non-ISA savings account offers a better deal now you can earn up to £1,000 (or £500 for higher-rate taxpayers) in tax-free interest every year. Unless your savings income will exceed your Personal Savings Allowance (PSA), all you need to worry about is which account pays the highest interest rate.
Finding the best deal
If you're still wondering where to invest your ISA allowance, MoneySuperMarket can help you find an account in just a few moments. All you need to do is decide which type of ISA you need – remember to factor in how soon you’ll need access to the money and who it’s for.
You’ll be able to compare accounts by the interest rate you’ll get and the minimum amount required to open the ISA – once you find the one you want, just click through to the provider to get started.