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The ISA allowance: how it works and how to use it

The ISA allowance1 [1] is the maximum amount of new money you can put into the range of tax-free savings and investment accounts that make up the ISA family.

The ISA allowance for the current tax year to 5 April is £20,000.

The tax year runs from 6 April to 5 April the following year.

ISAs are a brilliant vehicle for growing your wealth tax-free but the rules are complicated and seemingly made up by a bureaucrat with a grudge against humanity.

The purpose of this article is to help you make the most of your ISA allowance. We aim to iron out the many wrinkles within the system that aren’t readily apparent on the government’s ISA pages [2].

What is an ISA?

ISA stands for Individual Savings Account, and it’s the UK’s top tax-free account for savings and investments that you want to access before retirement age. ISAs are known as a tax-free wrapper because they legally protect the assets inside the account from these taxes:

You don’t even have to declare your ISA assets on your self assessment tax return. This can save you a bellyful of tax paperwork [3].

Your assets remain tax free as long they’re held in an ISA account and you don’t have the cheek to die. You don’t even lose out if you move abroad.

Unlike a pension, your ISA funds are typically accessible2 [4] at any time.

You’re also not charged income tax on withdrawals from an ISA unlike a pension, so there’s no danger of being pushed into a higher tax bracket by the wealth you accumulate.

Read this article for more on ISAs Vs SIPPs [5].

ISA accounts: what types are there?

ISA type Allowance3 [6] Eligible investments Notes
Stocks and shares ISA [7] £20,000 OEICs, Unit Trusts, Investment Trusts, ETFs, individual shares and bonds Age 18+. Can be flexible but only the cash component
Cash ISA £20,000 Savings in instant access, fixed rate, and regular varieties Age 16+. Can be flexible
Innovative Finance [8] ISA (IFISA) £20,000 Peer-to-peer loans (P2P), crowdfunding investments, property loans Age 18+. Can be flexible. Not covered by FSCS compensation scheme [9]
Lifetime ISA [10] (LISA) £4,000 As per cash ISA or stocks and shares ISA Open account from age 18-40. Pay in until age 50. Only use for buying first home, or from age 60, otherwise penalty charge
Junior ISA [11] (JISA) £9,0004 [12] As per cash ISA or stocks and shares ISA Open until age 18. Child may withdraw funds from 18+

New Help to Buy ISAs [13] are no longer available. If you have one already you can continue to save into it until 30 November 2029.

What is a NISA? NISA stands for New Individual Savings Account and was a term used to describe the new-style ISAs that were brought in by the Coalition Government of 2014. George Osborne’s NISA rules swept away the awkward restrictions of the past, and replaced them with a raft of new complications instead. Nowadays every ISA uses the NISA rules and so the NISA term has dropped out of use.

How much can I put in an ISA in 2020?

You can save up to £20,000 of new money into your ISAs during the tax year 6 April 2020 to 5 April 2021.

You can put all £20,000 of your ISA allowance into one ISA5 [14] or split it across any combination of the following ISA types:

A diagram that shows how to split your ISA allowance between the 4 different ISA types. [15]

The rule is that you can only pay new money into one of each ISA type per tax year.

For example you could put £20,000 into a stocks and shares ISA and nothing into any other type.

Or you could split your £20,000 something like this:

Or any combination you like, as long as you don’t pay in more than £20,000 within the tax year, and don’t put new money into more than one of each ISA type.

What about money in previous years’ ISAs? That money does not count towards your annual ISA allowance for the current tax year.

For clarity’s sake, we’ll refer to assets in your previous years’ ISAs as old money and assets in the current tax year’s ISAs as new money.

Interest, dividends, and capital gains do not count towards your ISA allowance, either.

Your £20,000 ISA annual allowance is a ‘use it or lose it’ deal. You can’t rollover any of it into the following tax year.

The ISA deadline for using up your allowance this tax year is 5 April 2021.

More wrinkles:

Withdrawing from an ISA

If you withdraw money from your ISA then can you replace it and not reduce your ISA limit?

Yes, but only if your ISA is flexible.

If your ISA is not flexible then a withdrawal reduces your tax-free ISA savings.

For example:

Flexible ISAs get around this problem – see below. Ask your provider if your ISA is flexible or check its key features.

How many ISAs can I have?

You can have as many ISAs as you like. Or as many as providers are willing to open for you.

You just can’t contribute new money to multiple ISAs of the same type in the same tax year. That rule remains the same whether we’re talking about a freshly opened ISA or one that you hold from previous years.

You can put new money into a previous year’s ISA if your ISA provider allows.

If you put new money into a previous year’s ISA (for example a stocks and shares ISA) then you can’t put new money into another stocks and shares ISA.

The government calls this the one-type-of-ISA-a-tax-year rule. Snappy.

However you can open new ISA accounts by transferring old money into them from previous years’ ISAs.

You could open ten stocks and shares ISAs with multiple providers by transferring old ISA money into them. Let sanity be your guide!

That leads to an obvious workaround for moving new money into more than one ISA of the same type. More on this below.

ISA transfers

An ISA transfer enables you to switch your ISA to another provider without losing the tax exemption on your assets.

The rules for any ISA opened in the current tax year are straightforward:

The golden rule with any ISA move is to transfer your money and not just go “sod it!” and withdraw it in a flounce. If you transfer your ISA to another provider, your assets retain their tax-free status. If you withdraw the money then they don’t.

Find out how to transfer a stocks and shares ISA [17].

ISA transfer rules for previous years’ ISAs

You have more options with ISAs opened in previous tax years. You can transfer any amount from any of your old ISAs to the same or any other type of ISA.

Transferring previous years’ ISAs leaves your current tax year’s allowance untouched.

For example, moving £40,000 from an old ISA into a new ISA still leaves you with a £20,000 ISA allowance for the current tax year.

You can transfer £4,000 into this year’s LISA from an old ISA (of any type), gain the government bonus, and leave your £20,000 allowance entirely intact.

This move maxes out your LISA allowance for the tax year, and you must not exceed that £4,000 limit by transferring in extra cash into the LISA during the current tax year.

As before, make sure you transfer an ISA using the new provider’s ISA transfer process to maintain its tax-free status. Don’t withdraw cash or re-register assets using any other method.

As you can see, your old ISA optionality amounts to a near Bacchanalian free-for-all.

Which brings us to our heavily trailed workaround for the one-type-of-ISA-a-tax-year rule. Hang on to your hat.

If you wanted to split £20,000 between two new stocks and shares ISAs then you could do it like this:

Money is fungible as they say.

Obviously this manoeuvre requires you having, say, an emergency fund [18] of cash tucked away in your old ISAs, but that’s a very good idea anyway.

Flexible ISAs

Flexible ISAs let you withdraw cash and put it back again later in the same tax year without grinding down your current tax year’s ISA allowance, or reducing how much you’ve saved tax-free. The following ISA types may be flexible:

Flexibility is not an inalienable right. The ISA provider has to offer it and be prepared to deal with the administrative faff. Providers often offer flexible and inflexible versions of the same ISA type.

Here’s an example to show how the flexible ISA rules work:

You can still pay £15,000 into your flexible ISA before the ISA deadline at the end of the tax year.

Remaining ISA allowance = £15,000 (£10,000 remaining contribution + £5,000 replacement of the withdrawal.)

A formula for calculating the remaining ISA allowance when you withdraw from a flexible ISA [19]

If your ISA was inflexible then your remaining ISA allowance would be just £10,000. In other words, you couldn’t replace the withdrawal amount, which loses its tax-free status.

Contributions made in the same tax year as withdrawals work in this order:

  1. Replace the withdrawal.
  2. Reduce your remaining ISA annual allowance.

Withdrawals from an old flexible ISA can be replaced in the same tax year and won’t reduce your current ISA allowance, if the ISA is no longer active.

Flexible ISAs with assets from previous tax years and the current tax year work like this:

Withdrawals

  1. From money contributed in the current tax year.
  2. From money contributed in previous tax years.

Replacement contributions

  1. Replace previous tax year’s withdrawals.
  2. Replace current tax year withdrawals.
  3. Reduce your remaining ISA annual allowance.

All replacement contributions must happen in the same tax year as the withdrawal.

Some providers say that the withdrawal has to be replaced in the same ISA account that you took it from.

The ISA rules allow you to put your withdrawn money back into different ISA type(s) with the same provider, if they make that facility available. Check your provider’s T&Cs. Or send them thousands of emails in BLOCK CAPITALS to make them respond.

A flexible stocks and shares ISA allows you to replace the value of cash withdrawn. You can’t replace the value of shares, or other investment types that you moved out of the account.

You can sell down your assets, withdraw the cash, and then replace that cash later in the tax year, and buy more assets with it.

Dividend income should also be flexible in a flexible ISA scenario. Looney Tunes.

If you transfer your flexible ISA to another provider then check that their product is also flexible.

You may lose the ability to replace withdrawals if you don’t replace them before you transfer a flexible ISA. Again, this is determined by your provider’s T&Cs rather than the rules. (Subject them to a paid Twitter campaign to get an answer on this one.)

If your withdrawals result in account closure then your provider can allow you to reopen your flexible ISA in the same tax year and replace the money. That applies to old and new ISA accounts but check with your provider… (Via a billboard installed outside their window if necessary.)

Flexible ISA hack to build your tax-free ISA allowance

  1. Open a flexible, easy access ISA that accepts ISA transfers.
  2. Transfer your non-flexible old ISAs into the flexible ISA.
  3. Your flexible ISA now accommodates the value of the old ISAs – say £40,000.
  4. If your flexible ISA doesn’t pay table-topping interest then withdraw your cash and spread it liberally among the humdinger accounts of your choice, or into an offset mortgage account.
  5. Move your cash back into the flexible ISA by 5 April of the current tax year, and fill as much of the current year’s ISA allowance as you can, too. For instance another £20,000.
  6. In our example, you now have £40,000 + £20,000 = £60,000 tax-free and flexible.
  7. From April 6 of the new tax year: withdraw your cash and liberally spread it…
  8. Repeat as required.

It may look like a vain hope at the moment, but this method builds up a flexible tax-free position that could prove valuable later in life.

Perhaps it could be a place to shelter and grow your 25% tax-free pension cash, which could be instantly transferred into a stocks and shares ISA come the day. Or maybe you’ll sell a business one day, or receive some other windfall, or taxes could go up…

Watch out for the £85,000 FSCS compensation [9] limit (see below) and open a new flexible ISA with a different authorised firm before you go over that line.

What happens if you exceed the ISA allowance?

HMRC will be in touch if you exceed the ISA allowance. You may be let off for a first offence but otherwise they will instruct your ISA provider on what action to take.

Action is likely to include your extraordinary rendition to an offshore black site where you will be forced to read HMRC compliance manuals for the rest of your life.

Sorry, I must stop reading conspiracy theories.

Or maybe HMRC will require overpayments and excess income to be removed from your account. And invite you to pay income tax and capital gains (potentially on all assets in the ISA) from the date of the invalid subscription until the problem is fixed.

You can call HMRC on 0300 200 3300 to discuss. Just don’t expect them to admit the Deep State stuff [20]. Open your eyes sheeple!

Your ISA provider may also charge you a fee for all the hassle.

You can similarly get into hot water for dropping new money into your ISA as a UK non-resident, or for breaching the one-type-of-ISA-a-tax-year rule, or for breaking the age restrictions.

FSCS compensation scheme

If your ISA provider goes bust and your money can’t be recovered, then the Financial Services Compensation Scheme (FSCS) waits in the wings.

Watch out for the definition of an authorised firm. Often multiple brand names sit under the same authorised firm umbrella.

For example, if you have cash at HSBC and First Direct then you’re only covered for £85,000 across both because they are one and the same authorised investment firm.

Investments parked at the same bank should be covered for another £85,000 on top of your cash.

What happens to my ISA if I move abroad?

You can still put new money into your ISA for the remainder of the tax year when you stop being a UK resident. You can’t contribute new money again until your residential status changes back.

Your ISA assets will continue to grow free of UK tax but watch out – your new country of residence may demand a slice.

You should tell your ISA provider when you are no longer a UK resident. The UK means England, Wales, Scotland, and Northern Ireland. The Channel Islands and the Isle of Man are excluded.

If you split your time between the UK and other territories then you can do a residency test [22] to determine your status. Fun!

You don’t lose [23] your ISA annual allowance if you’re a Crown employee serving overseas, or their spouse / civil partner.

Any questions?

Well, I’m sure that snappy post has cleared everything up but let us know in the comments if there’s any other ISA related business you’d like us to cover.

Inheriting an ISA [24] is a whole other post. But just in case you’re planning on inheriting one very soon, (Hark! Is that the sound of sawing through brake cables?) then check that link to stop you salivating in the meantime.

Take it steady,

The Accumulator

Note: This article about The ISA allowance was updated in 2020. This means reader comments below may refer to a previous version of the article and may reference details that are now out of date. Check the dates for when the new comments start if confused to ensure you are getting the latest feedback on how ISAs work.

  1. Also known to the government but to nobody else as the ‘subscription limit’. [ [27]]
  2. Exceptions: funds in a Junior ISA before the child reaches age 18, Lifetime ISA, Innovative Finance ISA loan lock-ins, and fixed-term/regular saver Cash ISAs where you’ll pay various penalties for early release. [ [28]]
  3. Max per year. [ [29]]
  4. per child [ [30]]
  5. The max contribution into a LISA is £4,000 a year. [ [31]]
  6. Disclaimer: exaggeration for comic effect. [ [32]]