How ISA rules are changing

In the November 2023 Autumn Statement, Chancellor Jeremy Hunt unveiled the new rules around Individual Savings Accounts (ISAs) to come into effect from April 2024.

Some of the biggest changes included the ability to pay into multiple ISAs of the same type in each tax year, as long as the overall allowance is not breached, and the ability to do partial transfers of ISA funds regardless of when you first deposited the money. 

Currently, you can pay into just one ISA of each type per tax year, for example just one cash ISA and one stocks and shares ISA and can only do partial transfers of funds that you’ve paid in before the current tax year.

With the new changes, cash savers will have the option to open multiple cash ISAs each year, which could be particularly helpful if you’ve opened a fixed rate cash ISA , for example, with less than the full allowance. With a fixed rate cash ISA, once the initial deposit has been made, you are unable to add any further monies. Therefore, at present, unless you wanted to utilise your remaining allowance in a stocks and shares ISA, you wouldn’t be able to open another cash ISA, so would be unable to utilise your remaining allowance. Investors too will be able to open ISAs with more than one provider and have far more flexibility switching.

But it’s worth remembering that the potential disadvantage that this flexibility brings is that if you are opening multiple accounts you will need to be mindful of the total amount you have contributed so that you make sure you have not exceeded the ISA limits. Plus, the added time and resources needed to review and potentially switch multiple ISAs, going forward. 

In short, the changes give significant adaptability back to savers, allowing them to adjust to the financial climate in a far more fluid way. 

However, this extra flexibility does not come without it’s caveats. When opening multiple accounts, savers will need to be mindful of the total amount they are contributing so that they don’t breach their £20,000 ISA contribution limit. Opening multiple accounts will also come with an increased demand of the saver’s time to review and manage these different accounts.  

It’s important to note that the amount you can save in ISAs and JISAs is not changing, and instead remains frozen at £20,000 for ISAs and £9,000 for JISAs. Similarly, Child Trust Funds remain frozen at £9,000 and LISAs at £4,000, excluding the Government 25% bonus. 

And for those under 18, adult cash ISAs will no longer be accessible. At the moment you can still open an adult cash ISA from the age of 16. However, with the new changes, those aged 16 and 17 will only have access to Junior ISAs. So, for those falling in that age-bracket, now might be the time to consider opening an adult cash ISA before next April (2024) when the policy comes into effect.

What is an ISA?

An ISA, or Individual Savings Account, is a scheme that allows individuals to save up to £20,000 in total into cash and investments the returns of which are free of tax on dividends, interest, and capital gains. Essentially, it’s a savings account that you don’t pay tax on. 

The different types of ISAs

There is a variety of ISAs to choose from in the UK, each with their own unique features and benefits. As a starting point, there are three main types to consider:

Cash ISA

A cash ISA is essentially a tax-free savings account that allows you to invest up to £20,000 each tax year. What’s notable about cash ISAs is that you do not have to pay any tax on the interest you earn. Cash ISAs have become particularly valuable as interest rates have risen as people are paying more on their non-ISA savings accounts. Where larger amounts of savings are concerned the difference can be significant. 

Stocks and Shares ISA

Much like the cash ISA, you can deposit up to £20,000 each tax year (but this is the total that you can deposit across all ISAs that you subscribe to each year) and you do not pay tax on any gains made. As the name suggests, in a stocks and shares ISA your funds are invested in a range of assets including stocks, shares, bonds and funds. With many stocks and shares ISAs, you will get to choose where you invest your savings. This means that there is some inherent risk in stocks and shares ISAs, as the value of investments can go down as well as up. 

Lifetime ISA

Lifetime ISAs are notable because of the relatively huge, guaranteed returns. Although you can only save up to £4,000 a year in lifetime ISAs, the Government guarantees that 25% of your investment will be matched. That means if you deposit the maximum amount of £4,000 in your lifetime ISA each year, the Government will add an additional £1,000 tax-free annually. The caveat is that the money accumulated in a lifetime ISA can only be used to either buy your first home, or to be withdrawn after the age of 60 for retirement. Any earlier withdrawal incurs a 25% penalty. 

When choosing a style of investment to suit your needs, you may want to consider how long you plan to invest for and how much you would like your money to grow. It is also important to understand what movement in value you may or may not be happy with and any potential losses that may happen. That is why professional independent financial advice can be crucial for understanding how to take those first steps towards a secure financial future. 

If you want to find out more, why not give us a call on 0333 323 9065 or book a free non-committal initial consultation with one of our chartered advisers to find out how we can help.

Arrange a free initial consultation

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

Investment returns are not guaranteed, and you may get back less than you originally invested.