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Your ISA questions, answered

Ahead of the 5 April, ISA deadline for this tax year, Hannah Duncan answers some of the most frequently asked ISA questions

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Millions of us have opened an ISA since they were launched in 1999. Collectively they’ve helped us save over £29 billion in tax.

The deadline to secure your ISA allowance this tax year is only weeks away on the 5 April, so you need to act soon if you would like to invest.

With the end of the tax year fast approaching, we’ve answered some of the most frequent questions about ISAs.

This article isn’t personal advice. Tax rules can change and the benefits depend on your personal circumstances. Unlike the security of cash all investments will fall as well as rise in value so you could make a loss. If you’re not sure whether an investment or an ISA is right for you, please ask for advice.

What’s an ISA and how much can I put into it?

ISA stands for Individual Savings Account. It’s one of the most popular ways to invest and save money tax-free (known as a “tax wrapper”). It was introduced by the UK Government in 1999 to help us grow our finances for the future.

Under the current ISA rules (tax year 2019/2020), anyone over the age of 16 can save up to £20,000 per tax year in a Cash ISA.

If you’re over the age of 18 you can choose to direct this money to a Stocks and Shares ISA, or split it between the two.

For under-18s, there’s a Junior ISA in to which you can save up to £4,368 (in 2019/2020)

And if you’re between 18-39, you can open and add up to £4,000 to a Lifetime ISA each tax year and the government will add a further 25% – meaning you can get up to £1,000 each year.

The limits on what you can add in are known as your ISA allowances. They reset on 6 April every year, and any unused allowance is lost.

How do ISAs work?

Investments and cash held in an ISA are sheltered from the taxman. You don’t have to pay any UK income tax on interest from your cash savings, or UK income and capital gains tax on your investments. The money you manage to save or invest in your ISA is free from these taxes, not just for this year, but for every year thereafter.

The best way to make ISAs work for you is to save or invest as much as you can afford. Even if you can only add a little, over the long-term it can make a difference to your financial future.

How many ISAs can you have? Can I have more than one?

You can put up to £20,000 into an ISA in each tax year (in 2019/2020) and you can split this between six different types of ISA – Cash, Stocks and Shares, Innovative Finance, Lifetime, Help to Buy and a Junior ISA.

For example, you can have some money in a Stocks and Shares ISA, some in a Lifetime ISA, and some in a Cash ISA, as long as you do not exceed £20,000 annually. The combination is your choice, but you can’t add money to two of the same ISA type in one tax year – you couldn’t add money to two separate Stocks and Shares ISAs from different providers.

Should I invest in a Stocks and Shares ISA or Cash ISA?

Saving in a Cash ISA tends to be for the shorter- term, while investing in a Stock and Shares ISA is for longer term. It’s a good idea to also build up ‘rainy day’ cash savings you can easily withdraw if you need to. Longer term, you might want to consider investing as a way of growing your money.

How big should your rainy day fund be?

Investing in the stock market has historically outperformed cash and provided the best chance of beating inflation over the long term. But the volatility isn’t for everyone so you have to be happy with the risks associated with investing.

Between the end of 2010 and the end of February 2020, the UK stock market returned over 68% growth compared to just over 8% for the average Cash ISA.

Factoring in the recent significant market falls following the outbreak of coronavirus, at close on 19 March the UK market was up 28% since the end of 2010.

When investing in equities, unlike interest paid on cash, investment growth and income are not guaranteed. Past performance isn’t a guide to future returns, investments can rise and fall in value and you could get back less than you put in.

Value of £1,000 in the UK stock market vs average Cash ISA

Past performance is not a guide to future returns. Source Lipper IM and Bank of England. FTSE All-share correct as at 19 March 2020, Cash ISA at 29 February 2020.

Don’t lose your ISA allowance for this year

There’s only a few weeks to go until 5 April, when the annual tax allowance closes, resets and your unused allowance is gone forever.

To avoid missing out, you could secure as much of your ISA allowance as you feel comfortable with and can afford to before this time. With a Stocks and Shares ISA, you can invest up to £20,000 this tax year. Once you have decided to go ahead, opening or topping up an ISA is simple and takes a matter of minutes. You can also open with cash to secure the allowance and choose your investments at a later point.

Taking the steps towards fulfilling your lifelong dream could be just at your fingertips … if you’re quick.

More about the HL Stocks and Shares ISA and how to apply

Hannah Duncan is an investment writer, and founder of Hannah Duncan Investment Content, with years of experience producing content for global leaders in finance and retail.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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