ISA FAQs: Everything You Need To Know To Get Ahead Of The Tax Curve

Now that the new tax year has begun, that means a brand new ISA allowance. While you might feel like you’ve got plenty of time to use it, the potential benefits of an extra year of growth make it well worth using at the beginning of the year.

If you consistently get in early and utilise the full allowances, not only will you be able to generate returns completely tax free, but you might even be able to become an ISA millionaire. 

Even though the basics of how an ISA works is pretty straightforward, there are a lot of small details we get questions about. And rather than bore you to death with a detailed technical guide on the specific rules and regulations that surround ISAs, we thought it would be better to provide a skimmable list of FAQs, which are sure to cover everything you need to know.

In this list we cover what we consider the best form of ISA - the Investment or Stocks & Shares ISA. But we’ve also included some details on the others, the Cash ISA, Innovative Finance ISA and the Junior ISA. 

If you have a question that isn’t on this list, or you just want to cut to the chase and invest as soon as possible, simply get in touch with Rosecut. We can talk you through which types of investment accounts are right for you, and create a plan to help you reach financial freedom.

The Stocks & Shares ISA 

We’re going to start with the main type of ISA you need to know. It’s generally referred to as a stocks & shares ISA, which is a bit dumb when you think about it, because stocks and shares are basically the same thing. It’s like calling a cash ISA a cash & money ISA. Anyway, we digress.

While the name might not make much sense, the account itself sure does. For investors who are looking to grow their money over the long term, to eventually achieve real financial freedom, it’s basically a no-brainer.

Here are some of the most common questions and key facts when it comes to a stocks & shares ISA.

Q. What is a stocks and shares ISA?

1. A stocks and shares ISA is a type of account (sometimes called a ‘tax wrapper’) that allows you to invest in stocks, shares, and other assets such as bonds, funds, and investment trusts. It allows tax free growth and income, no matter how big those returns are.

Q. How much can I invest in a stocks and shares ISA each year?

1. You can invest up to £20,000 per tax year in a stocks and shares ISA. This is known as the annual ISA allowance, and it covers all the different types of ISA out there. So while you can put £20,000 into a stocks and shares ISA, that means you can’t then put anything into another type of ISA in that same tax year.

Q. What is the deadline for opening a stocks and shares ISA?

1. You can open a stocks and shares ISA at any time of the year, but to make use of your annual ISA allowance, you must open and fund it by the end of the tax year, which is April 5th.

Q. Can I transfer my existing ISAs into another stocks and shares ISA?

1. Yes, you can transfer your existing ISA accounts into another stocks and shares ISA without incurring any tax charges. This is known as an ISA transfer and you can make it between different ISA types, as well as accounts of the same type held with different companies.

Q. What should I invest into within my stocks and shares ISA?

1. Obviously, choosing what to invest in within your stocks and shares ISA will depend on your personal circumstances, goals, and risk tolerance. With that said, it makes sense to hold the highest risk assets within an ISA. That’s because those should be the ones with the highest potential returns, which means the biggest tax savings when using a tax free account.

Q. Can I withdraw money from my stocks and shares ISA?

1. Yes, you can withdraw money from your stocks and shares ISA at any time. There aren’t any penalties or tax consequences for doing it, but you’ll lose the tax benefits of your ISA if you don’t replace the withdrawn amount in the same tax year.

Q. Can I have multiple stocks and shares ISAs?

1. You can have more than one, but you can’t contribute to more than one in a given tax year. However, you can transfer your existing ISAs to a new provider and continue contributing to them, so it makes sense to keep them consolidated.

Q. What are the tax benefits of a stocks and shares ISA?

1. The tax benefits of a stocks and shares ISA include no capital gains tax on any profits you make and no income tax on any dividends you receive. You also do not have to declare any ISA investments on your tax return and pay no tax on withdrawals.

Q. Can I open a stocks and shares ISA for my child?

1. Yes, you can open a Junior stocks and shares ISA for a child under the age of 18. We cover that further down in these FAQs.

Q. What happens to my stocks and shares ISA when I die?

1. If you pass away, your stocks and shares ISA will become part of your estate. If you’re over the IHT threshold, your beneficiaries will have to pay inheritance tax on your ISAs.

Q. Are stocks and shares ISAs guaranteed to make a profit?

1. Nope, sorry. Investing in a stocks and shares ISA is just like any other investment. Depending on what you choose to invest in you could make a lot of money, lose money and everything in between.

The Cash ISA

Next we’re going to look at the second most common type of ISA, the Cash ISA. Honestly, this is pretty straightforward. It’s essentially a tax free cash account. Nevertheless, we’re thorough, so let’s cover some FAQs of Cash ISA’s.

Q. What is a Cash ISA?

1. A Cash ISA is a type of savings account that allows you to save money in cash while enjoying tax-free interest. But you need to have a LOT of cash in one to even start paying tax. Should you have a lot of money in cash? No. Over the past 20+ years cash has always performed below the level of inflation, meaning money sitting in a Cash ISA is guaranteed to lose value every year. Generally we recommend no more than 3 months living expenses in cash for those with stable incomes, bumping that up to 6-12 months if you think there’s any risk to your income.

Any more than 12 months living expenses in cash, is simply a waste.

Q. How much can I save in a Cash ISA each year?

1. You can save up to £20,000 per tax year in a Cash ISA. Just like with the stocks and shares ISA, this annual limit includes all your ISAs combined.

Q. What is the difference between a Cash ISA and a stocks and shares ISA?

1. A Cash ISA only allows you to save money in cash, while a stocks and shares ISA allows you to invest in a range of assets. Cash ISAs are lower risk but only offer minimal interest and no potential capital gains.

Q. Can I have multiple Cash ISAs?

1. Yep, the same rules apply. You can have more than one, but you can only contribute to one in a given tax year.

Q. Can I withdraw money from my Cash ISA?

1. Yes, you can withdraw money from your Cash ISA at any time. But again, if you don’t put it back within the same tax year, you’re limited to the annual ISA allowance amount.

Lifetime ISA

Now we’ve covered the two most common types of ISA in the UK, the next few are a bit more niche. They’re actually not really worth considering for most people, and we find that for most of our clients, there are better options.

But that’s not to say they’re never worth considering, so here we’ll go some of the key facts of Lifetime ISAs.

Q. What is a Lifetime ISA?

1. A Lifetime ISA is a savings account that is designed to help people aged 18 to 39 save for their first home or for retirement. It offers a government bonus of 25% on contributions, up to a maximum of £1,000 per year. 

Q. How does a Lifetime ISA work?

1. You can save up to £4,000 per year in a Lifetime ISA, and the government will add a 25% bonus to your contributions. The money can be used to buy your first home, or it can be saved until you're 60 and then used for retirement.

Q. Are there any other specific requirements to have a Lifetime ISA

1. As well as being aged between 18 and 39 to have a Lifetime ISA, you also need to be a resident of the UK just like all forms of ISA.

Q. What happens if I withdraw money from my Lifetime ISA?

1. If you withdraw money from your Lifetime ISA before you turn 60 and you're not using it to buy your first home, you'll have to pay a withdrawal penalty of 25% of the amount you withdraw. That means you lose the initial bonus, plus an additional penalty.

Q. Can I transfer my Lifetime ISA to another provider?

1. Yes, you can transfer your Lifetime ISA to another provider at any time.

Q. How long does it take for the government bonus to be added to my Lifetime ISA?

1. The government bonus is added to your Lifetime ISA every month, based on the previous month’s contributions..

Q. Is the government bonus taxable?

1. No, the government bonus is not taxable

Q. Can I continue to contribute to my Lifetime ISA after the age of 40?

1. Yes, as long as you open a Lifetime ISA before the age of 40, you can contribute until you’re age 50.

Q. Can I use my Lifetime ISA to buy a second home?

1. No, you can only use your Lifetime ISA to buy your first home.

Q. What happens to my Lifetime ISA when I die?

1. If you die, your Lifetime ISA will be closed and the funds will be passed on to your estate. It will lose the tax free wrapper and may be subject to inheritance tax.

The Innovative Finance ISA

We’re getting into the weeds now, and this form of ISA is niche and very uncommon. It is a form of investment ISA, but generally speaking there are far better options for investors looking to turn a profit.

Q. What is an Innovative Finance ISA (IFISA)?

1. An Innovative Finance ISA is a type of tax-efficient savings and investment account that allows you to invest in peer-to-peer (P2P) lending and crowdfunding platforms.

Q. How much can I invest in an IFISA?

1. You can invest up to £20,000 per tax year in an IFISA, which is the same as the annual ISA allowance for Cash and Stocks and Shares ISAs.

Q. What is the difference between an IFISA and a Cash ISA or Stocks and Shares ISA?

1. The main difference between an IFISA and other types of ISAs is that it allows you to invest in P2P lending and crowdfunding platforms instead of cash or traditional investments like stocks and shares. This offers potentially higher returns but also comes with higher risks.

Q. What risks are associated with investing in an IFISA?

1. Investing in an IFISA carries a higher risk than traditional Cash and Stocks and Shares ISAs as the underlying investments are often unsecured and not covered by the Financial Services Compensation Scheme (FSCS). This means that if the borrower defaults on their loan, you may lose some or all of your investment.

Q. Can I transfer my existing ISAs into an IFISA and the other around?

1. Yes, you can transfer your existing Cash, Stocks and Shares, and IFISAs into an IFISA without losing the tax benefits. However, your existing providers might charge a fee for the transfer and your existing assets will need to be sold prior to transfer. You can also transfer funds out of an IFISA into another form of ISA, but again, you will need to sell the investments to cash before this transfer can take place.

The Junior ISA

Got kids? A Junior ISA is one way that you can help save for their future andthey have a lot of the same benefits as adult ISA.

Q. What is a Junior ISA?

1. A Junior ISA is an ISA that allows parents, family members or friends to save or invest for a child who is under the age of 18 and a resident in the UK.

Q. What is the annual allowance for a Junior ISA?

1. The annual allowance for a Junior ISA is £9,000, which can be split between a Cash Junior ISA and a Stocks and Shares Junior ISA. 

Q. When can the child access the funds in their Junior ISA?

1. The child can access the funds in their Junior ISA when they turn 18. At that point, the account will automatically become a regular ISA, and the child will be able to manage the account and withdraw funds as they wish. Keep this in mind if you don’t want your kids handed tens of thousands of pounds the day they turn 18!

Q. Who can open a Junior ISA?

1. A parent or legal guardian can open a Junior ISA for a child who is under the age of 16. Once the account is opened, anyone can contribute to it, including grandparents, family members, and friends.

ISA Summary

We’ve covered a lot of ground there, so here’s a short summary of the key points to remember.

• You can invest up to £20,000 each tax year across all forms of ISA, which allows tax-free growth and income from investments in stocks, shares, and other assets.

• Generally, we recommend using a Stocks & Shares/Investment ISA as the first option, given the high potential for tax free growth.

• If you're considering a Lifetime ISA (LISA) as an additional form of retirement planning, you would be best suited to allocate the maximum £4,000 into this account type, leaving an additional £16,000 to be contributed to an Investment ISA.

• If you want to invest into an Innovative Finance ISA (IFISA), we would suggest limiting your annual contribution to £4,000 into an IFISA, as this is a niche form of investment that comes with additional risks over an Investment ISA.

• You can open and transfer ISAs at any point in the year, but you must fund it by the end of the tax year (April 5th) to make use of the annual allowance.

• Junior ISAs (JISAs) can be opened for children under 18, allowing for £9,000 to be saved per tax year. Funds are automatically transferred to the child when they turn 18.

• In our view, JISAs are a no brainer, with the understanding that it means financial education is important to ensure the children use the money sensibly when ownership is automatically transferred at 18.

• Cash ISAs also exist, but the benefits of Stocks & Shares ISAs far outweigh them in terms of potential returns, especially for long-term growth. Because Cash ISA interest is almost always below the rate of inflation, they’re effectively guaranteed to lose real value over the long term.

• ISAs can be transferred between different types and providers without incurring tax charges, but often the assets within the ISA will need to be sold to cash before a transfer can occur.

• Withdrawals from ISAs can be done anytime but remember that withdrawing from your ISA will lose its tax-free benefits if the funds aren't replaced within the same tax year. With a Lifetime ISA, you will also be subject to an early withdrawal penalty if the funds aren’t being used for the purchase of a first home.