Individual Savings Accounts (ISA): a guide for UK investors (08 Feb 2024)

The chancellor didn’t mention the humble Individual Savings Account (ISA) in his long Autumn Budget speech on 22^nd November 2023, but there have been some important tweaks to ISAs that are worth noting, all designed to aid long-term, tax efficient saving.

The biggest change, and one that was well trailed by the media, is that savers and investors will be able to hold multiple ISA subscriptions from 6^th April 2024. At the moment if you open a cash or stocks & shares ISA with one provider, you have to stick with them for that tax year. Partial transfers of ISA funds will also be allowed in-year between providers from 6^th April 2024.

The ability to start saving with another Cash ISA product provider mid-way through the tax year is a positive for investors and may incentivise providers to improve their interest rates. There are also likely to be some customers who want to mix fixed-rate deals and easy access savings, giving them greater flexibility with their savings. And you won’t need to reapply to “reopen” a dormant ISA from a previous tax year, as is the current rule.

Adults can currently newly save up to £20,000 into ISAs per tax year and the subscription limit will be maintained at the current level in the 2024/25 tax year. Annual limits for the Junior ISAs (£9,000), Lifetime ISAs (£4,000 excluding the government bonus) and Child Trust Funds (£9,000) will also remain at their current levels for 2024/25 tax year.

Some changes to look out for in the future that will affect ISA investors involve ‘fractional share ownership’. The government intends to permit certain fractional shares contracts as eligible ISA investments and will engage with stakeholders on the implementation. Fractional shares are particularly popular with younger investors via online trading apps. They enable investors to own a smaller chunk of expensive stocks, such as US stocks, without having to fork out big sums. The Autumn Statement has given the green light and they can now form a part of savers’ £20,000 yearly ISA allowance. This could provide millions of mass market savers and investors to access high performing and often higher and expensive risk shares in well-known companies as part of their portfolio.

Currently, six types of ISA currently exist:

1. Cash ISAs let you shelter cash or cash equivalents from the taxman. If interest rates stay below inflation, your money will lose value in real terms
2. Stocks & shares ISAs hold a wide range of stock market investments, including stocks and shares, bonds and funds.
3. Lifetime ISAs let people aged 18-39 save for their first home, or for later life. You pay in £4,000 per year and get a 25% government bonus (up to £1,000 per year). If you take the money out before you’re 60, or for any reason other than buying your first home or terminal ill health, you’ll be hit with a 25% government withdrawal charge
4. Innovative Finance ISAs let you save with peer-to-peer lenders, or invest in companies through crowdfunding sites. If the borrower defaults or collapses, your money is not covered by the Financial Services Compensation Scheme.
5. Help to buy ISAs are for would-be first-time buyers. You can save up to £12,000 and receive a 25% bonus when you use it to buy your first home. The maximum initial deposit is £1,000 and thereafter, a maximum contribution of £200 a month. Homes must cost £250,000 or less outside London or £450,000 or less in London.
6. Junior ISAs are saving vehicles for children, replacing the old Child trust Funds. These come in two varieties namely, cash and stocks & shares, a £9,000 subscription allowance and anyone can pay into them such as grandparents and family friends. Money is locked away until the child turns 18, when it turns into an ISA.

What is the ISA allowance in 2023-24?

For the 2023-24 tax year, everyone has an ISA allowance of £20,000. This is the maximum amount you’re allowed to pay into ISAs between 6^th April 2023 and 5^th April 2024. This ISA allowance is unchanged from 2022-23. If you don’t use your annual ISA allowance before the end of each tax year, you’ll lose it – and it will start anew on 6^th April.

How does the ISA allowance work?

Savers can deposit the full £20,000 into a cash, stocks and shares or innovative finance ISA, or any mix of the three types. If you’re saving up to buy property, there is also the Help to Buy ISA (no longer open to new applicants) and, for those aged 18-39, the lifetime ISA. Both of these ISAs have lower annual limits – but, whatever you pay in will be taken from your £20,000 allowance.

All UK residents aged 16 or over can have a Cash ISA, although you must be 18 before you can open a stocks and shares ISA. Crown employees serving overseas or individuals married to such employees are also eligible to open ISAs.

Tax advantages of a Stocks & Shares ISA

Essentially, because of the various tax breaks, an ISA lets you keep more of your money. You pay no additional income tax on any dividends received from equities, nor on any interest you receive from corporate bonds. In addition, you pay no capital gains tax if you sell your investments, especially when current legislation is seeing capital gains allowances reducing significantly. You cannot however, reduce your capital gains tax liability by offsetting losses your ISA investments may suffer against any profits gained outside your ISA. Tax benefits of an ISA may change in the future.

Can I inherit an ISA?

If your spouse or civil partner dies, you’ll probably be able to inherit their ISA savings through an ‘inherited Isa allowance’, also known as an ‘additional permitted subscription’ (APS). This means the surviving spouse has a one-off additional ISA allowance that’s equivalent to the value of the deceased partner’s ISA when they died.

So, if someone’s spouse passes away leaving an Isa worth £40,000, the surviving partner will not only have the £20,000 ISA allowance that’s open to everyone in the 2023-24 tax year, they’ll also have an additional allowance, or additional permitted subscription, of £40,000 for inheriting their spouse’s ISA. These rules have only been in place since April 2015.

To give people time to sort out the affairs of a deceased person, the increased ISA allowance can be claimed by filling out an application form and is available for three years after the date of death. If administering the estate takes longer than three years, the deadline is 180 days after the estate has been administered. These rules came into force in 2018, and mean that no money can be paid into the deceased’s ISA during administration, but it will continue to benefit from its tax-free status and any growth remains tax-free too. This status – known as a ‘continuing ISA’ – lasts until either the administration of the estate is complete, the ISA is closed, or three years have passed since the person’s death (whichever is soonest).

This article is based on our understanding of current legislation and taxation which can change at any time in the future. Blackadders Wealth Management LLP are Independent Financial Advisers and a Discretionary Investment Management Firm, authorised and regulated by the Financial Conduct Authority under FCA number 738512. The FCA does not regulate tax advice.