UK's 10 most googled ISA questions

What does ISA stand for?

Individual Savings Account – which doesn’t tell you anything terribly useful, so we need to go into a bit more detail.

What is an ISA?

ISAs are accounts that make anything held inside them free of UK income and capital gains tax.

They come in various guises, including Cash ISAs for savings and Stocks and Shares ISA for investments, plus Junior ISAs for children, Lifetime ISAs – which bear a bit more explanation – and Innovative Finance ISAs, which are a more niche option.

People also ask – ‘Are ISAs tax free?’

The answer is yes, they’re free of UK income and capital gains tax.

They also ask – ‘Are ISA withdrawals tax free?’

And, yes they are.

The Lifetime ISA (LISA) can come with a 25% penalty, but we’ll explain that in a moment.

The main takeaway for savers and investors though is that you can put aside money for the future without having to worry at all about these taxes.

What is a Cash ISA?

This is the most common kind of ISA, and is effectively just a savings account, but you never have to pay any UK income tax on the interest.

This should answer another popular question – ‘Do you pay tax on ISA interest?’ – because interest on a cash ISA is free of UK income tax.

If you save in an account outside an ISA, the first chunk of interest can be tax free depending on your tax band.

You get a personal savings allowance of £1,000 a year if you’re a basic-rate taxpayer and £500 if you’re a higher-rate taxpayer – although additional-rate taxpayers don’t get an allowance.

It’s worth pointing out that for Scottish taxpayers, the thresholds are based on the rates of tax across the rest of the UK.

Once you earn interest over this, you normally have to pay income tax on the rest – inside an ISA you don’t have to worry.

Like savings accounts, there are a few varieties.

You can get easy-access accounts that let you take money out whenever you want, but the interest will go up and down.

Alternatively, you can get fixed-rate accounts which tie the cash up for a specific period of time, but guarantee a rate for the period.

What is a Stocks and Shares ISA?

This is a type of investment account where any income and growth is free of UK income and capital gains taxes.

You can open a Stocks and Shares ISA and buy all sorts of funds and shares within the single ISA wrapper.

There’s no tax to pay when you buy and sell within the ISA or when you withdraw money.

You can also get stocks and shares ISAs from providers that will wrap a single investment – or a number of them from a limited range – within the ISA wrapper, so make sure you understand what’s on offer.

If you were to hold these things outside an ISA (or another tax wrapper, like a pension) then you have annual allowances (more on these below), and once you bust them, you might have to pay tax.

One key tax for investors is income tax on dividends – which you normally pay on the dividends you receive from companies or funds over a total of £500 a year.

Another one to watch is capital gains tax, normally paid if you make gains over £3,000 a year. You’ll generally make a gain any time you sell a specific investment that has risen in value, although there are other circumstances that can result in gains being made.

How much can I put in an ISA?

You can pay in up to £20,000 a year into ISAs each tax year.

You can split the allowance over a number of different ISAs, or put it all in one place. You don’t have to use the whole allowance, so you can save or invest whatever you can afford.

Some people ask – ‘When does the ISA allowance reset?’

You get a new allowance with every new tax year, which starts on 6 April.

How many ISAs can I have?

You can pay into as many different ISAs as you like each tax year (excluding Lifetime ISAs).

You can hold a mixture of Stocks and Shares and Cash ISAs, several Cash ISAs, several Stocks and Shares ISAs, any number of Innovative Finance ISAs, and all of these alongside a Lifetime ISA.

However, you can only pay into one Lifetime ISA each tax year.

All you need to do is stick to the overall limit of £20,000, and within that if you have a Lifetime ISA, you can pay in up to £4,000 into the LISA.

People also ask – ‘Can you have a cash and stocks and shares ISA?’ and ‘Can I have two Cash ISAs with different providers?’

The answer to both is yes.

What is a Lifetime ISA (LISA)?

If you’re aged 18-39 you can open a LISA and pay in up to £4,000 each tax year.

The government will top up your contributions by 25% – up to £1,000 a year.

There are LISAs that let you hold cash and those that let you invest in stocks and shares.

You can use your LISA money to buy your first home – worth up to £450,000 (although you must hold the account for at least a year before you do this) without paying a withdrawal charge.

There are a handful of other requirements, so make sure you check the small print before you sign up. You can also withdraw charge-free once you are 60 and use it for tax-free retirement income.

If you withdraw money for any other reason, however, you will normally pay a penalty of 25%. This doesn’t just remove the government bonus, it adds a 6.25% penalty on your own money too.

You can’t open a new LISA after the age of 40, but if you have opened one by then, you can continue paying into it up until you’re 50.

Does transferring an ISA count as opening a new one?

You can transfer without affecting this year’s ISA allowance, but you need to be careful how you do it.

It’s vital not to withdraw the money from the ISA and try to move it by paying it into your new ISA, or it will normally come out of this year’s allowance.

Instead, contact the provider you want to move to and ask them to request the transfer.

You can transfer between ISAs of the same type, and between different types of ISA – so Cash ISA to Stocks and Shares and vice versa. However, bear in mind that not all ISA providers accept transfers in.

If you want to transfer from a Cash or Stocks and Shares ISA (or a Help to Buy ISA) to a Lifetime ISA, you can only transfer up to the £4,000 annual limit – and the amount you transfer will come out of this year’s LISA allowance.

Can you have a joint ISA?

You can’t. But if you’re saving or investing towards a joint goal, there’s nothing to stop you opening an account each, paying an agreed amount into it, and talking to one another about how it’s saved and invested.

Are ISAs subject to inheritance tax (IHT)?

Yes. If you bust the nil-rate bands, there could be tax to pay.

However, bear in mind that if you own your own property and are leaving it to children or grandchildren, you normally get the nil-rate band and residence nil-rate bands – protecting up to the first £500,000.

If you’re married or in a civil partnership, then the surviving spouse can use their spouse’s unused allowance (assuming their spouse left all assets to them) – so up to the first £1 million could be IHT free.

If you’re leaving the ISA assets to anyone other than a spouse or civil partner, it’s also important to know that they will lose their ISA wrapper when they receive them (or 3 years after your death, if earlier). So if they want to protect them from tax after they inherit, they’ll need to use their own allowance.

There are separate rules for married couples and civil partners. If you pass everything to your spouse, there is no IHT to pay.

Spouses can also benefit from an additional ISA allowance – known as an additional permitted subscription.

This is broadly equal to the value of assets the person who passed away held in ISAs – although there’s some small print around when this is valued.

It means a spouse or civil partner who is left assets that used to be in an ISA could potentially wrap everything back up in this allowance, without using up their usual annual allowance.

Even if they weren’t left the ISA, they can claim the additional permitted subscription and use it to wrap around other assets.