We’ve all heard about the rainy-day fund, but have you heard about the build-your-future-fund? This comes in the form of an Individual Savings Account (ISA), which is a tax efficient savings or investment account that allows you to save for your future and any unexpected curveballs life may throw at you. The ISA allowance is how much you’re allowed to put into your account during each tax year, which runs from 6 April to 5 April of the following year. Here's everything you need to know about ISA allowances and the different options available to fit your personal needs.
For the 2023/2024 tax year, the ISA allowance is £20,000. This is the maximum you can pay in across any ISAs you hold, or open, in a tax year. This limit is set by the government and can change.
Each tax year you can also only open one of each type of ISA - that's a cash ISA, Stocks and Shares ISA, Innovative finance ISA and Lifetime ISA. A Junior ISA is an investment product for children under the age of 18 with a separate allowance of £9,000 in each tax year.
Here is an overview of the ISA allowances for the 2023/2024 tax year. Remember, there’s a maximum of £20,000 across all adult ISAs you hold.
|ISA Type||Maximum you can pay in||Additional information|
|Cash ISA||£20,000||Interest on your savings will be free from UK tax.|
|Stocks and Shares ISA||£20,000||Lets you invest in things like shares, bonds, investment funds and exchange-traded funds. Any returns will be free of UK income tax and capital gains tax.|
|Innovative finance ISA||£20,000||Peer-to-peer lending where you won’t pay UK tax on your interest.|
|Lifetime ISA||£4,000||Save for a home or retirement. This lower allowance of £4000 still counts towards your £20,000 total for the tax year. But the government will top up your ISA with a 25% bonus, up to £1000 a year.|
|Junior ISA||£9,000||For children under 18. Separate from the £20,000 allowance.|
The value of investments can go down as well as up and you could get back less than you’ve paid in. With a Cash ISA, inflation will reduce the spending power of your money.
Your exact tax benefits will depend on your circumstances and may change in the future.
Example of ISA allowance usage
Here's an example of how allowances work with more than one ISA. You decide to open two ISAs: a cash ISA and a Stocks and Shares ISA. You want to use both. You can put £10,000 in your cash ISA and £10,000 in a Stocks and Shares ISA during the 2023/2024 tax year. This hits your £20,000 ISA allowance limit.
You'll have to wait until the next tax year to pay in more to either account or you'll exceed your ISA allowance and may face penalties or tax implications on the excess amount contributed.
Choosing the right ISA for you
Knowing all the different ISA options will help you choose the one that aligns best with your needs. Here are the four types of ISAs to consider, learn more about your options here.
- Cash ISA: Anyone looking for a low risk ISA option, should consider a cash ISA. It's like a savings account, but as the money grows you won't have to pay income tax or capital gains tax on the interest. Some cash ISAs have withdrawal penalties, so it's best to check before you open one.
- Stock and Shares ISA: This account lets you invest in things like shares, bonds, investment funds and exchange-traded funds. Unlike a cash ISA, stocks and shares ISA can fall and rise in value on changes in market conditions, the economy and company performance.
- Innovative finance ISA: With an innovative finance ISA, you can invest tax-efficiently. By using peer-to-peer lending platforms, you can lend out your savings to borrowers and earn tax-free interest. Again, this kind of ISA investment carries a level of risk.
- Lifetime ISA: Saving for retirement or a first-time buyer? This one's for you. Designed to help you get on the property ladder, the Lifetime ISA can be used for a deposit or towards your retirement savings. You can pay in up to £4000 a year and your Lifetime ISA contributions get a 25% bonus from the government, up to £1000.
The value of a Stocks and Shares, innovative and lifetime ISA's can fall as well as rise, and you could get back less than you put in.
Why should you use an ISA
- Using an Stock and Shares ISA over an extended period may yield more favourable outcomes than cash savings or even a cash ISA. It may be a good choice if your goal is long-term growth.
- No matter which ISA you choose, the UK tax efficiencies is one of the top benefits