Your top ISA questions answered

From 6 April 2023, there will be a massive increase in the number of investors who’ll start paying tax on their wealth. Rachel Lacey explains how to shrink your tax bill.

ISAs have never been more important for investors. From 6 April this year, the capital gains tax allowance will fall from £12,300 to £6,000, while the dividend tax allowance will fall from £2,000 to £1,000. Then, in April 2024 both those allowances will be halved again to just £3,000 for CGT and £500 for dividends.

That means in the coming years, there will be a massive increase in the number of investors who will start paying tax on their wealth.

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However, it is possible for many investors to avoid paying tax on their investments.

Any money you hold in an ISA is sheltered from tax. That means there will be no tax on any income from your investments while they grow, nor will there be any tax to pay when you take money out.

But, with tax breaks like that on the table, there are restrictions and rules that limit their use. Get the lowdown on everything you need to know with our top ISA FAQs.

How many different types of ISA are there?

It is argued that there are too many, and that the current system is confusing. But there are currently four key types of ISA:

• Cash ISAs

Offered by banks and building societies, these are essentially tax-free savings accounts.

• Stocks and Shares ISAs

Offered by online investment platforms, you can hold a range of investments in a Stocks and Shares ISA, including funds, investment trusts, exchange-traded funds (ETFs) and bonds in addition to UK and overseas shares.

• Lifetime ISAs

Lifetime ISAs are available in cash or stocks and shares versions and are a tax-incentivised way of saving for either your first property or retirement. You need to be aged between 18 and 40 to open a Lifetime ISA.

• Innovative Finance ISAs

The latest addition to the clan, IF ISAs let you shelter investments in peer-to-peer lending and crowdfunding from tax.

It’s also possible to save on behalf of a child with a Junior ISA. They’re also available on a cash or stocks and shares basis but the money can only be accessed once the child has turned 18.

You might also have a Help to Buy ISA but these are being phased out and are no longer available to new savers.

How much can I invest in ISAs each year?

Each year you can invest a maximum of £20,000 into ISAs – this is your ISA allowance. You can put all that money into one ISA, or spread it across different types of ISA, for example cash and stocks and shares.

Importantly though, if you have a Lifetime ISA, you can only pay in a total of £4,000 each tax year and that counts towards your overall £20,000 allowance.

Junior ISAs have a separate allowance – currently £9,000 a year per child.

What if I don’t use my full ISA allowance, can I pass it on to next year?

While it might be possible to carry forward your annual allowance for pensions, the ISA allowance works very much on a ‘use it or lose it’ basis.

That means if you haven’t used your ISA allowance by 5 April, that allowance is lost for good (although you will get a new allowance on the 6 April each year). This is why there is always a rush of ISA activity towards the ends of the tax year, the so-called ISA season, where savers and investors are encouraged to make the most of the year’s allowance.

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How many ISAs can I have?

You can have multiple ISAs, but you cannot pay into more than one of any specific type of ISA in one tax year. So while it’s fine to pay into a cash and stocks and shares ISA, you can’t pay into two stocks and shares ISAs. You also need to be mindful that you don’t accidentally pay in more than the ISA allowance each year.

When can I access my ISA?

In most cases you can take money out of your ISA whenever you like. The two notable exceptions are Junior ISAs, which cannot be touched until the child turns 18, and Lifetime ISAs, which can only be accessed to buy a first property or after you turn 60, otherwise a 25% penalty fee will be charged.

However, when you do take money out of your ISA, it’s important to note that unless you have a so-called ‘flexible ISA’ you won’t normally get that allowance back. That means if you invested your full allowance and made a withdrawal you still wouldn’t be able to pay in any more until you get a new ISA allowance at the start of the next tax year.

It's down to individual product providers to decide whether their ISAs are flexible. You might want a flexible ISA if you plan to dip into your ISA during the tax year, but while you might consider it for a cash ISA, it’s arguably less important for stocks and shares ISAs as these are designed for longer-term saving.

Is it worth saving in a cash ISA?

The personal savings allowance – which was introduced back in 2016 – means that most people won’t ever have to pay tax on savings income.

Currently the allowance means that basic-rate taxpayers can earn £1,000 in savings interest before they need to worry about paying income tax, while higher-rate taxpayers can earn £500. Only additional rate taxpayers do not get a personal savings allowance at all.

That’s not to say there aren’t any benefits to cash ISAs – they keep your tax affairs simple as you won’t have to declare them to HMRC and they provide tax shelter for the long term. However, if you’re using your full allowance each year and splitting it between cash and stocks and shares, you might decide it’s more tax-efficient to prioritise your ISA allowance for stocks and shares, and choose the top-paying ordinary deposit account for your cash savings.

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What happens to my ISA when I die?

When you die your ISA will form part of your estate, making it potentially subject to inheritance tax. However, if you leave it to a spouse or civil partner, they can inherit it without losing any of the tax benefits. This is permitted by giving them an additional one-off allowance known as an ‘additional permitted subscription’ which doesn’t impact their own ISA allowance.

Can I transfer stocks and shares into my ISA?

If you’ve got investments outside your ISA, you cannot transfer them over. However, using a process known as Bed & ISA you can sell them and immediately buy them back within a stocks and shares ISA. This will give them shelter from tax going forwards, you just need to be mindful that you don’t sell so much that you trigger a capital gain above your CGT allowance and incur a tax charge.

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Can I transfer my ISA to a new provider?

It is possible to transfer your ISA to a new provider, for example, if you can find a cash ISA paying a higher interest rate or a stocks and shares ISA with lower charges. Alternatively, you may decide to move a cash ISA into a stocks and shares ISA, or vice versa. However, you just need to follow the correct transfer process and not cash in your ISA if you want to ensure you don’t lose the tax-free status and eat into your current ISA allowance.

Always check any new cash ISA accepts transfers in (not all do) and whether there will be any fees to pay for exiting a stocks and shares ISA.