The government loves to fiddle with Isas. Every year, the rules are tweaked, new types of Isas arrive and the amount you can save changes. But the basic principles remain the same. An Isa is a shelter for your savings and investments: pop your money inside and it’s protected from income tax, capital-gains tax and dividend taxes. That means you’ll hold on to more of your gains and so your wealth will grow faster.
The three main types of Isa
The simplest type is a cash Isa, which works like a savings account and can be opened with a bank or building society. Then there’s the stocks and shares Isa, which lets you hold shares, bonds, funds and other investments. These are typically offered by stockbrokers and fund platforms. You can also now put money into peer-to-peer investing with an innovative finance Isa, but the choice is limited.
You can invest up to £15,240 in these three Isas in the current tax year, with the option of putting all your money in one, or spread across the three in whatever proportions you like. That allowance will rise to £20,000 from 6 April. You can only pay into one cash Isa, one stocks and shares Isa and one innovative finance Isa each year. However, you can open a new account each year, leave the old ones invested, change the investments in them and transfer them to a new provider.
Saving for a house
If you are saving for your first home you can use a help-to-buy Isa. You can deposit a maximum of £200 a month (plus an initial £1,000), then when it’s time to buy your house the government will add a 25% top-up, capped at £3,000. You can only open a help-to-buy Isa if you’ve never owned or co-owned a residential property before (whether bought or inherited). You can’t open a cash Isa and a help-to-buy Isa in the same year, but a few providers offer a split Isa that puts a cash Isa and a help-to-buy Isa in the same wrapper.
The lifetime Isa, which launches on 6 April, works in a similar way, but is intended to give the option of saving for a house or for retirement and is more flexible. Anyone aged 18 to 39 will be able to open one and deposit up to £4,000 a year. The money cannot be accessed unless you want to buy your first house, or you are over 60 years old. As well as growing tax-free, the government will also add a 25% bonus to your balance each year until you turn 50. That means you could potentially grab £32,000 in free cash. You will be able to contribute to a lifetime Isa as well as a cash Isa, a stocks and shares Isa and an innovative finance Isa in the same year.
Isas for children
You can also open a junior Isa for your child and pay in up to £4,080 this tax year, rising to £4,128 from 6 April. That money can be put in cash or investments. It can’t be accessed until the child turns 18, when they will gain complete control of the account, although they will be able to manage the money from the age of 16. Each child can only ever hold a single junior Isa at a time, although you can transfer their account to a different provider.
Moving and withdrawing your money
Finally, be careful if you want to move money between Isas. If you withdraw the money from one account and pay it into another Isa, then it will count towards that year’s Isa allowance. If you want to move money, tell the company providing the new Isa, and they will arrange a formal transfer. You can also withdraw some money from an Isa and pay it back into the same account before the tax year is over without affecting your allowance, but not all providers offer this flexibility.