Insights for Savers

ISAs are an invaluable resource for anybody to have, especially while saving for a rainy day. Though, unless you’ve spent some time digging into the specifics of ISAs, you’re unlikely to have a solid grasp of exactly what they are, the benefits of them, and how they work.

Whether you’re just curious around ISAs, or if you’re thinking about opening one soon, here, we’ll detail everything you need to know to get the most out of your own ISA.

 

What is an ISA?

First thing’s first: what is an ISA in the first place?

ISA is an acronym for Individual Savings Account. Although they sound similar, ISAs differ to other kinds of savings accounts because ISAs offer tax free interest on your savings.

As a quick recap, savings accounts allow you to earn interest on the money that is deposited within them.

The Personal Savings Allowance means:

  • Basic tax rate payers can earn up to £1,000 in savings interest before paying tax. High rate tax payers can earn up to £500. After this, any further money is subject to tax.
  • Additional rate tax payers (45%) don’t receive a Personal Savings Allowance.

At which point, having an ISA becomes beneficial. With an ISA, not only are you able to deposit up to £20,000 every year, completely tax free, but any interest earned on top is also tax free.

Man and boy sitting on dock

Recent changes to ISAs

Ahead of the 2024 tax year, the Government has introduced two key changes to ISAs that are worth knowing about:

Splitting ISAs between different providers

Currently, you can only open one type of ISA per provider, but these rules are set to change. From April 2024, you’ll be able to open more than one of the same type of ISAs with different providers with your annual ISA allowance, offering you greater access to more competitive rates and packages.

 

Partial ISA transfers to different providers

When transferring an ISA to another provider, you’re only currently able to transfer the entire current year’s ISA, rather than a portion of it. This is also set to change. So, if you have £10,000 sitting in an ISA and you wish to only transfer £5,000 to a different provider, you can do so from April 2024 onwards.

To read more about all the new changes introduced for the 2024 tax year, click here.

 

How do ISA accounts work?

Here we’ll explore the inner workings of an ISA, to give you a better understanding of how they operate.

What are the different types of ISAs available?

  • Cash ISA – these are similar to savings accounts and allows you to deposit and withdraw money. Cash ISAs are the most accessible and are a great way to get started with tax free savings.
  • Junior ISA – Junior ISAs are great for parents hoping to give their children a small pot of money to use when they’re ready. These accounts can be opened and kept in place for a child prior to the age of 18, at which point they are allowed to withdraw the money kept inside.
  • Stocks and shares ISA – instead of accruing interest, the money kept within these accounts is used to invest in stocks and shares. These are commonly used if the goal is to put money away for a longer term.
  • Innovative finance ISA – these ISAs are similar to stocks and shares ISAs, except the money is invested in peer-to-peer lending and crowdfunding. As one of the newer forms of ISA, these are less common than others.
  • Lifetime ISA – lifetime ISAs have become the natural replacement for the now defunct Help to Buy ISA. These ISAs are used for either the purchase of a first home or save for retirement. If used for the intended purpose, the Government grants a 25% bonus on top of the funds kept within it.

 

How many ISAs can I have?

If you’re looking to open multiple ISAs, there’s good news. Provided you meet the eligibility criteria for whichever account you’re applying for, there’s no limit to the number of ISAs you can have open at any one time.

If you do have more than one ISA, just be sure to stick to the deposit restrictions below.

 

How much can I put in an ISA?

Everyone in the UK can deposit up to £20,000 in an ISA every tax year. This money can either be invested entirely into one account or split among the four different types.

You can also transfer a previous year’s ISA funds into a new cash or investment ISA, and it won’t count towards the annual allowance. Therefore, if you already have one or more ISA, it is possible to combine and invest way beyond the £20,000 limit. 

The only caveat to this being that Lifetime ISAs have a maximum deposit of £4,000 each year.

So, if you’re wondering, can I pay into two cash ISAs, the answer is yes. For example, a user could deposit £10,000 into their cash ISA; £4,000 in a lifetime ISA, and £6,000 into a stocks and shares ISA.

The recent changes to ISAs have taken these rules even further – you’re not able to pay into four different types of ISA per tax year, but you can pay into multiple providers of ISA, up to your annual £20,000 tax free savings allowance, as opposed to just one.

 

Withdrawing funds

In the majority of cases, it is perfectly fine to withdraw money from an ISA. The only thing to consider with this would be the terms agreed between yourself and your bank.

If you have a fixed-term ISA, for example, your bank may penalise you for withdrawing funds before the fixed term comes to an end. The most common penalty for this is lost or lower interest payments meaning your money won’t be working as hard as it was before.

The same also applies to a Lifetime ISA. As these accounts have a specified purpose, using the money for anything else can mean giving up the 25% top up bonus applied by the state. So, before you withdraw money from your ISA, be sure to carefully review the terms of your account.

 

How does ISA interest work?

When it comes to interest, ISAs are fairly straightforward. Just like you would have with a personal savings account, an ISA offers the account holder an extra amount of money depending on how much is being kept within the account.

This interest is worked out on a per annum basis. Meaning that, if the money in the account was kept in place for 12 months, the stated interest would be applied. The exact amount of interest earned can change depending on additional contributions throughout the year (if your ISA allows for such a thing), so the amount you earn can vary as the year progresses.

 

Should I open an ISA?

ISAs are built to be tailored for multiple different uses. Therefore, it’s difficult to give a default answer as to whether an ISA is useful for you.

We’d encourage you to review the options available to you, and what exactly your goals and expectations are from such an account. Savvy savers will see the most benefit from an ISA after reaching their tax free interest accrual. At which point, an ISA can be opened to save in a more tax efficient way.

Tailored ISA offerings from Aldermore

Now that you’re fully clued up on what ISAs are and how they work, all that’s left to do is take a look and see if opening an ISA could be the right thing for you.

We can help you get started thanks to our range of Cash ISAs. From a Fixed rate ISA to our 30 Day Notice account, and our new Easy access ISA, start your savings journey with Aldermore, today.

 

View our range of Cash ISAs