An individual savings account, or ISA, is a tax-efficient wrapper that you can use to shield savings and investments from tax.
The ISA allowance for 2023/24 is £20,000 and it will remain at this level for the 2024/25 tax year as well. With just a few weeks to go before the current tax year finishes on April 5, 2024, there are plenty of reasons to make use of this year’s allowance while it’s still available.
Contents
- ISAs are highly tax-efficient
- ISAs are easy to set up
- You can transfer your ISA
- You can have more than one ISA
- ISAs can be a good long-term investment
- You can’t carry your allowance forward
- Cash ISAs are often still worth it even with the personal savings allowance
- You don’t need a big lump sum to get started
- You can set one up for your children too
1. ISAs are highly tax-efficient
Any returns on money saved or invested in ISAs is protected against UK income tax.
You also won’t be charged any capital gains tax (CGT) on any gains you make when you sell an investment wrapped in an ISA. Learn more about CGT in our article What is Capital Gains Tax and how do I pay it?
There’s no dividend tax to pay on any dividend income you incur from the investments in your ISA either. Our article How are dividends taxed? explains how dividends work and how they are taxed outside of an ISA in more detail.
2. ISAs are easy to set up
ISAs are usually very easy to set up. Most providers will let you set up an ISA online, as long as you have your National Insurance number and bank details to hand, as well as some proof of identification. If everything goes smoothly, you should be able to have your account up and running in a matter of minutes.
If you’re looking to invest in an ISA, fund platforms such as Fidelity, Hargreaves Lansdown and AJ Bell can help narrow down your choices with recommended fund lists, which might highlight 50 funds out of the 3,000 plus available to UK savers. They also offer ready-made funds for a range of different risk profiles if you don’t want to pick investments yourself. Bear in mind that there are charges associated with stocks and shares ISAs and you’ll pay a fee to the platform as well as for the funds held.
3. You can transfer your ISA
You can switch to another provider if you like their offering better, or can transfer your money between different types of ISAs, though bear in mind that this can take up to 30 days in some cases. Learn more about ISA transfers in our guide ISA transfers: what are the rules?
Many ISA providers will also allow you to withdraw and replace cash in your account during the tax year without it affecting your annual allowance – accounts that let you do this are called flexible ISAs. Find out more about flexible ISAs in our article Flexible ISAs explained.
4. You can have more than one ISA
You aren’t limited to just one ISA each tax year – you can split your allowance across different types of ISA if you want to. So, for example, you could put £10,000 of your £20,000 ISA allowance into a cash ISA and £10,000 into a stocks and shares ISA at the same time.
The only exception is a lifetime ISA, into which you can only pay £4,000 a year. However, these are only available to customers between the ages of 18 and 40.
Read more about all the different kinds of ISAs you can have in our article Everything you need to know about ISAs and about the number of ISAs you can have in our guide How many ISAs can I have?
5. ISAs can be a good long-term investment
If you can afford to, making use of your ISA allowance every year could potentially be a hugely beneficial long-term decision for your finances.
This is particularly true with an investment ISA, where your money is invested in stocks and shares, and sometimes other assets such as bonds and property. Over long-term periods, historically shares have tended to outperform cash, although of course the past cannot be relied on as a guide to what will happen in future.
You could opt for a collective investment fund, where your investment is managed by a professional fund manager, or you could choose what kind of investments to make yourself. Many investment platforms offer a range of ready-made investment portfolios that match different levels of risk, so you don’t have to spend hours picking investments yourself.
Remember that with any form of investment, returns are not guaranteed, and you may get back less than you originally invested, so you’ll need to be comfortable accepting a level of risk. If you’re nervous about current markets, you can always secure your allowance with cash before the end of the tax year and then think about where to invest later on. Learn more about risk in our article What’s your attitude to risk?
6. You can’t carry your allowance forward
Your yearly ISA allowance is on a “use it or lose it” basis – unlike some other tax allowances, there’s no opportunity to carry it forward to a future tax year if you don’t use all of it.
This means that once the tax year is over your allowance for that year is gone as well, though of course you will then have a fresh allowance for the new year. If you were to make full use of your ISA allowance before 5 April, you could begin the new tax year with £20,000 already stored away, and a fresh £20,000 to make use of.
7. Cash ISAs are often still worth it even with the personal savings allowance
Basic and higher rate taxpayers get a yearly personal savings allowance (PSA) that lets you earn a certain amount of savings interest tax-free. For basic rate taxpayers, up to £1,000 of savings interest can be earned tax-free, while for higher rate taxpayers this falls to £500 (additional rate taxpayers do not get a PSA).
The PSA is separate from your ISA annual allowance, meaning interest from cash ISAs does not count towards your personal savings allowance. Although, depending on the interest rates available to you, you may be better off prioritising your PSA over a cash ISA for your savings. However, if you have exceeded your PSA for the year already or think you are likely to in future, having savings in a cash ISA could provide valuable protection.
8. You don’t need a big lump sum to get started
Although your ISA allowance is £20,000, you don’t need to have this much in order to set up an account.
You can open most cash ISAs with as little as £1. However, for a stocks and shares ISA, there may be a minimum amount you need to invest per month, usually starting from around £25, although some allow you to invest from as little as £1.
9. You can set one up for your children too
A Junior ISA is a separate account you can set up on behalf of your child, or that your child can set up for your grandchild. You can shelter £9,000 in one of these accounts tax-free in the current tax year, in either a cash ISA or stocks and shares, to be accessed by the child when they turn 18 (though they can start managing the account themselves at 16).
So, if one of your reasons for investing in an ISA is to have money for your children later on, you could simplify this and set up an account that they will be able to use directly when they are older. Find out more in our guide Financial gifts for young children: what are the options?
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