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ISA Allowance & Rules

Luisa Rollenhagen

Luisa Rollenhagen is a journalist and investor who writes about financial planning for Wealthsimple. She is a past winner of the David James Burrell Prize for journalistic achievement and her work has been published in GQ Magazine and BuzzFeed. Luisa earned her M.A. in Journalism at New York University and is now based in Berlin, Germany.

What is ISA allowance

ISA stands for Individual Savings Account. Pretty simple, right? But there's more to that little acronym than meets the eye. An ISA actually has a lot to offer if you know how to use it right. If you want to start investing or just want to save a bit smarter, the ISA is a great place to start. That’s because any interest, dividends, or capital gains you earn on the money in your ISA is tax-free (ah, those magic words). Meaning that any money you make is all yours, to do with what you wish.

There are two types of ISAs: stocks and shares ISAs and cash ISAs. These simply refer to how you want to store your money in the account (the first being an investment portfolio, and the latter a tax-free savings account). Both of them are tax-free, and because of that, the interest rates you’re getting from these ISAs will usually be higher than interest rates available in conventional savings or investment accounts.

The UK government introduced ISAs in 1999 to streamline two previously existing schemes and provide savings incentives. They’re available to any UK taxpayer 18 years and older (except for cash ISAs, which you can already open at 16), provided that they haven’t taken out an ISA this year already. The other catch? You can only invest or add a certain amount each year, which is known as your ISA allowance.

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ISA Allowance 2018/2019

For the tax year 2018/2019, that current ISA allowance is £20,000, which was the same as the past allowance for 2017/2018. The 2018 tax year started on April 6 and ends April 5, 2019. That means that you can invest up to £20,000 during that period, whether that’s in the form of cash or stocks and shares. The ISA annual limit is put in place so that there’s a cap on how much money is being moved into a tax-free environment. After all, the government does need taxes for things like public infrastructure and social programs.

The good thing is that the maximum ISA allowance doesn’t have to go all in one place. You can choose whether you want to split this between stocks & shares ISAs and cash ISAs or keep it all in one or the other. You can also invest lump sums or regularly contribute a little bit at a time.

Another important thing to keep in mind? Any unused allowance for that tax year doesn't roll over into the next year. So if you only contributed £16,000 to your ISA for 2018/19, you won’t get a £24,000 allowance next year. It just goes back to £20,000.

Cash ISA Allowance

A cash ISA is usually a good choice if you were planning to place your money into a savings account anyway but don’t want to deal with the taxes associated with that. Also, any interest you earn in a cash ISA won’t affect your annual Personal Savings Allowance (PSA) of £1,000. However, if you’re a basic taxpayer, a cash ISA might not actually be so beneficial to you due to the PSA.

The maximum ISA cash limit for 2018/19 is £20,000. If you withdraw money from your cash ISA during that year, the annual allowance won’t be reset. So if you reached your annual limit and withdraw £6,000, you won’t suddenly have an allowance of £14,000. It’ll still be £20,000 until the next tax year.

Cash ISAs tend to have modest interest rates, usually around 1% to 2%. So a cash ISA is a good solution if you’re simply looking to park your money somewhere convenient where it can accumulate some small interest without you worrying about taxes.

Junior ISA Allowance

A Junior ISA allows parents to give their kids a head-start by setting them up with an ISA fund of their own. It’s available to children under the age of 18, and comes in both the cash and stocks and shares variety.

For the 2018/19 tax year, the Junior ISA limit for both account types is £4,260. Another difference between the Junior ISA and the regular ones is that you can’t withdraw the money from the ISA until the child turns 18. After that, the account is immediately converted into a regular ISA in the child’s name and is immediately accessible for them. If you contribute regularly to it (and teach your kid how to contribute and build up healthy saving habits, too), your kid will be off to a really good start before they’ve even started uni.

Help-to-buy ISA

Within the two major categories of ISAs there are a couple of sub-categories, such as the help to buy ISA. It’s a cash ISA meant to encourage and help first-time homeowners by providing free matching bonuses on deposits. But you have to hurry if you want to take advantage: The program will close to new savers by 30 November 2019.

Here’s how it works: You can deposit up to £200 a month (plus an extra £1,000 the first month you open it) and the government will match 25% of your deposits up to a lifetime £3,000 maximum bonus, provided the funds are used to buy a house under £250,000, or £450,000 if you’re buying in London. The house must also be purchased with a mortgage. Super simple, right? If you feel a bit dizzy after reading that,

Stocks and Shares ISA Rules

While a stocks and shares ISA has the same annual limit as the cash ISA, the difference between the two is that the stocks and shares ISA has a greater potential for higher returns. Given that you’re not paying taxes on those returns, that’s a nice chunk of money you’re saving each year, on top of what you’re earning. Of course, with a stocks and shares ISA, there’s always the higher risk potential that’s inherent in any investing choice.

A stocks and shares ISA might be the better option for you if you don’t need access to that money right away, and are happy with letting it sit for a while— probably five years at the least. Keep in mind you can only pay into one ISA in each tax year, but you can open a new ISA with a different provider each year if you want to. This goes for both stocks and shares ISAs and cash ISAs. That means that you’re allowed to have multiple ISAs, you just have to be careful because you’re only allowed to pay into one of them each tax year.

What you put in your stock and shares ISAs is entirely up to you, and you can choose from stocks, bonds, or managed funds. It's worthwhile diversifying your investment portfolio — this means if one performs poorly your entire portfolio doesn't get dragged down. Also, If you have an existing ISA and want to transfer it to another provider, you can. You might do that to avail of lower fees or a better service offered by a different investment provider. In some cases, providers will cover the transfer fee if you switch to them.

Lifetime ISAs

Another option you can pursue for both cash and stock and shares ISAs is a lifetime ISA, which offers a similar government incentive that the help-to-buy ISA does, but at a bigger scale. Twenty-five percent of anything that you deposit into the so-called LISA will be met by the government, similar to the help-to-buy ISAs, but gives you the chance to earn up to £32,000 if you contribute the maximum amount. It can also be used to buy any first home priced under £450k anywhere in the UK.

However, it’s important to note that the annual Lifetime ISA deposit limit is £4,000, and that amount counts toward your annual £20,000 ISA allowance. And this money obviously comes with some strings attached: Lifetime ISA will assess a 25% penalty should you withdraw anytime other than three specific circumstances: after you turn 60, if you’re buying your first home, or if you’re dying of a terminal disease.

At the end of the day, you have to decide which ISA options match your financial goals. But regardless of what you choose, the fact is that the longer you keep your money in an ISA, the more you’ll reap the tax-free benefits as your interests accumulate and your money grows unencumbered.

Interested in learning more about tax-free investing but unsure where to start? If the idea of setting up your own portfolio for a stock and shares ISA freaks you out, you’re not alone — and we’re here to help. Wealthsimple (that's us) will help you open an ISA with a low-fee diversified portfolio tailored to your financial goals, with expert advice guiding you at every step of the way. Get started investing in a Wealthsimple ISA today.

Last Updated December 13, 2018

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