Individual savings account


An individual savings account is a class of retail investment arrangement available to residents of the United Kingdom. First introduced in 1999, the accounts have favourable tax status. Payments into the account are made from after-tax income, then the account is exempt from income tax and capital gains tax on the investment returns, and no tax is payable on money withdrawn from the scheme. Cash and a broad range of investments can be held within the arrangement, and there is no restriction on when or how much money can be withdrawn. Since 2017, there are four types of account: cash ISA, stocks & shares ISA, innovative finance ISA and lifetime ISA. Each taxpayer has an annual investment limit which can be split among the four types as desired. Additionally, children under 18 may hold a junior ISA, with a different annual limit.
Until the lifetime ISA was introduced in 2017, ISAs were not a specific retirement investment, but any type can be a useful tool for retirement planning alongside pensions.

Origins

ISAs were introduced on 6 April 1999, replacing the earlier personal equity plans and Tax-Exempt Special Savings Accounts. Other tax-advantaged savings that predate ISAs include many offered by National Savings and Investments, a state-owned institution which has in the past offered a range of other tax-free accounts, in addition to its own ISAs.
Junior ISAs, introduced in 2011, replaced the Child Trust Fund.
With a few exceptions, such as from an employee share ownership plan, all investor contributions must be in cash, not kind. Adult ISAs are available to UK residents aged over 16, provided that they have a National Insurance number, but individuals between 16 and 18 are only permitted to use the adult cash component or can use a Junior ISA.
There are four broad types of adult ISA: cash, stocks and shares, innovative finance and lifetime.

Cash ISA

An account which enjoys tax free status, usually deposit accounts with £85,000 Financial Services Compensation Scheme protection. These are normally offered by banks and building societies but investment firms can also offer them. It is mandatory that money held in a cash ISA be made available on request within 15 days but it is permitted to have a loss-of-interest penalty for this, and this is how term deposits are typically made available.

Help to buy ISA

A help to buy ISA, introduced in 2015, is a form of cash ISA that receives a government bonus if the money is used in paying the deposit on a first home purchase. The usual rule that any number of accounts can be held with the same ISA manager applies, and many providers offered the ability to hold both HTB and other cash ISA accounts with current year money in them. However, only one HTB ISA in total could be held so if it was desired to put current year money into the HTB ISA, all other cash ISA current year money also had to be paid into a cash ISA with the same provider.
The Lifetime ISA, announced in March 2016, replaces the HTB ISA. HTB accounts could be opened until 30 November 2019 and contributions can continue until 30 November 2029. An account holder can also have a Lifetime ISA, although the government bonus from only one of the accounts per person can be used for a purchase. Transfers from HTB to Lifetime ISA were allowed from the 2017-18 tax year, with transitional arrangements for that year only.
Help to buy ISAs have been criticised:
Investors' money is invested in 'qualifying investments', which are:
It is mandatory that money held in a stocks and shares ISA be made available on request within 30 days but it is permitted to have a loss-of-interest penalty for this.

Innovative finance ISA

Innovative finance ISAs became available from 6 April 2016. They are similar to cash and S&S ISAs but designed to be used for peer-to-peer lending investments, which were not previously eligible to be held in an ISA. Only platforms with full FCA authorisation are eligible to offer IF ISAs; at launch this barred all major existing platforms because they were awaiting authorisation, leaving just eight at the time relatively minor platforms available and 86 awaiting approval. Equity-based crowdfunding, although similar to peer-to-peer lending, is not included in the eligible products for this type of ISA.
From 1 November 2016 many transferable debentures including debt securities and bonds became eligible for inclusion provided they are issued by a company or charity. They can be included whether offered via a P2P platform or not.
The same rules with respect to subscription limits and transfers are applicable to the IF ISA as other adult ISAs, including the restrictions of current year money going to only one ISA manager, and an unrestricted number of managers for past year money.

Lifetime ISA

In the 2016 Budget it was announced that a lifetime ISA would be introduced from 6 April 2017 as a more flexible way to save for both home purchase and retirement. Only those aged 18 to 40 can open an account, and at the end of the tax year a 25% bonus on contributions of up to £4,000 a year will be paid. The £4,000 is part of the overall ISA annual allowance, not in addition to it. On reaching age 50, no more money can be added to the account and eligibility for the 25% bonus ceases, but the account will still earn interest or investment returns.
Permitted investments are as for cash or S&S ISAs, and as for them any number of accounts is allowed, but only one account can hold current year money. After the account has been open for at least 12 months, the money can be used for a first home purchased with a mortgage and priced up to £450,000; the money is paid to the conveyancer and can be returned to the ISA if the sale does not complete.
Money can be withdrawn on buying a first home, or after reaching age 60. A person who is diagnosed with a medical condition giving a life expectancy of under one year can withdraw the full amount including bonus without penalty at any age, using the definition in the similar pension law. Any other withdrawal, including transfers to another type of ISA, incurs a 25% charge. The accounts have the same inheritance tax treatment as other ISAs.

Junior ISAs

Junior ISAs were introduced on 1 November 2011 with an initial subscription limit of £3,600, which was increased to £4,368 by the time of the 2019-20 tax year. At age 18 the JISA converts to an adult ISA. Like adult ISAs, JISAs are available in both cash and stocks and shares types. Money cannot be withdrawn until age 18 unless a terminal illness claim is agreed or following closure of the account after the death of the child. A child can open their own account from age 16, otherwise a person with parental responsibility can do it. They are available to those who are:
Unlike an adult ISA a child can only hold a total of one cash ISA and one stocks and shares ISA, including for all money from past years, but transfers of these two accounts can be carried out between providers as for adult accounts. Up to the full JISA limit can be used for any combination of cash and stocks and shares ISA subscriptions. An additional adult cash ISA can be held between 16 and 18. In the year in which a child becomes 18 the full adult and child ISA limits can both be used. Unlike adult ISAs a JISA allows transfers from the S&S form to the cash form.
Each child ISA has a single registered contact, a person with parental responsibility. From age 16 a child can register to be their own contact and this registration cannot normally be reversed. Except in that case and adoptive parents registering, the previous registered contact will be contacted to obtain their consent to a change of contact.

Subscription limits

There are restrictions on investing in ISAs in each tax year which affect the type of ISA that may be opened and the cumulative amount of investment during the course of that year. The key restrictions are:
These restrictions only apply to money paid in during the current tax year. For adult ISAs an unlimited number of ISA managers' accounts can hold money from past years and it can be freely moved between managers using ISA transfer requests.
Tax yearAdult limit Lifetime ISA limitJunior limit
2015/2016£15,240N/A£4,080
2016/2017£15,240N/A£4,080
2017/2018£20,000£4,000£4,128
2018/2019£20,000£4,000£4,260
2019/2020£20,000£4,000£4,368

Transfer rules

Transfers between providers are allowed. A transfer from a Cash ISA to another Cash ISA must usually be completed within 15 business days. Any other type of account transfer must usually be completed within 30 days. There are a range of restrictions and workarounds:
The Flexible ISA Features are optional add-on feature introduced from 6 April 2016 for any adult ISA type that allow withdrawing cash and redepositing it in the same tax year. Providers are not required to implement the flexibility features and do not have to implement them all if they allow some. A person can withdraw an unlimited amount of money from an account and return up to that amount within the same tax year without it counting against the annual subscription limit. A person with £100,000 of past year money could withdraw say £90,000 on 15 April and redeposit it as desired within the tax year. If a transfer is done the firm receiving the transfer is told only the amount of current year allowance available to be used, if any.
If current year money is withdrawn, that money can be used to subscribe to a different type of ISA in the current year without having to replace it into the flexible ISA it was withdrawn from. This is particularly useful if both current and past year money were withdrawn from the same account. Otherwise all past year money would have to be replaced before any current year money would count as being replaced, due to the rules that current year money is the first withdrawn and last replaced. Past year money does have to be replaced before being transferred in the usual ISA transfer way, it must not be directly placed into the new account or it would count as a new current year subscription instead of a replacement.

Tax treatment

Interest on cash held in an ISA, including stocks and shares ISAs, is not subject to income tax.
Dividends are not subject to additional tax, interest on bonds is not taxed, and capital gains are not taxed.
There is no need to report interest or other income, capital gains, or trades to HMRC as it is not taxable income. This is a considerable paperwork reduction for active traders or those who may otherwise be required to report their trades because they have total sales value exceeding four times the annual CGT allowance, which outside a tax wrapper would require that all trades be reported even if there is no capital gains tax to pay.
Since the income is not taxable it did not count for age-related personal income tax allowance reduction when that extra allowance existed.

Death of investor

Cash or investments held in ISAs are ordinarily subject to Inheritance Tax when the account holder dies, if their estate is valued above the IHT nil-rate band. Since August 2013 it became possible to hold AIM-listed shares in a stocks and shares ISA, some of which qualify for business relief; in this way a stocks and shares ISA portfolio consisting of these securities can be gifted without being subject to Inheritance Tax, provided the qualifying securities have been held for at least two years upon death.
For deaths of ISA investors on or after 3 December 2014, the surviving spouse or civil partner can apply for an increased ISA allowance in the form of an Additional Permitted Subscription. This allowance is separate from the normal annual allowance, and is based on the value of the deceased's ISA; it is available whether or not the surviving spouse or civil partner inherited the ISA assets.

Fund supermarkets and self-select ISA providers

There is no legal distinction between a fund supermarket and a self-select ISA provider. These are merely marketing terms used by stocks and shares ISA providers to distinguish the type of business that they tend to seek. Firms favouring collective investment business will often call themselves fund supermarkets, while firms who focus on share dealing will often call themselves self-select ISA providers. A firm can freely offer all types of permitted investment, regardless of its name, and many do. Others choose to offer only collective investment funds. An individual may not be the provider for their own ISA.
Except for fund houses, it is usual for providers to offer the facility to hold funds managed by many different organisations.
Prior to the effect of the Retail Distribution Review it was normal for S&S providers to be paid by fund managers out of their usual charges, though some may have both explicit dealing charges and collect the commission while others may make charges and refund all commission. This is now prohibited for new customers who must be charged a fee instead. In the current transition period existing customers may be able to hold a mixture of commission paying investments and the "clean" versions that do not pay commission, perhaps paying a platform fee only for the clean portion. Some providers have chosen to be clean only. Some commission may be rebated to customers but this is not required.
Examples of ISA providers that have been identified as good by The Lang Cat and Investors Chronicle are in order of mention Hargreaves Lansdown's Vantage Service, AJ Bell Youinvest, Charles Stanley Direct, Bestinvest's Online Investment Service, Barclays Stockbrokers, TD Direct Investing, Alliance Trust Savings, Interactive Investor and The Share Centre.

Charges

The ISA cash component normally has no disclosed charges. The company can make money from the differences between its deposit and lending rates, fees, differences between wholesale and retail deposit rates or other means. For example, Hargreaves Lansdown quoted a 0.8% profit margin on cash held in its Vantage platform in spring 2014. Some providers charge a fee for transferring to another provider.
The built-in annual "re-registering" of an ISA may attract a fee which may be automatically extracted from an account, though this is normally done only by firms specialising in share deals, not those using funds or both funds and shares.
Stocks and shares ISA fund supermarkets often reduce some or all of the initial and annual charges made by fund houses to below the level paid when purchasing direct from the fund provider, often to zero initial charge. Some providers levy dealing charges even for fund transactions, typically firms desiring direct share investments more than fund investments. Dealing charges for shares are normal even from providers that do not charge for fund transactions. Firms that primarily focus on fund transactions tend to have higher share dealing charges than providers specialising in share transactions.

History

Past subscription limits

Tax yearCash limitStocks & shares limitTotal subscription limitJunior ISA limit
1999/2000 to
2007/2008 		£3,000£4,000£7,000not available
1999/2000 to
2007/2008 		£3,000£7,000£7,000not available
2008/2009£3,600£7,200£7,200not available
2009/2010£3,600 £7,200£7,200 not available
2010/2011£5,100£10,200£10,200not available
2011/2012£5,340£10,680£10,680£3,600
2012/2013£5,640£11,280£11,280£3,600
2013/2014£5,760£11,520£11,520£3,720
2014/2015
From 1 July 2014		£5,940
£15,000		£11,880
£15,000		£11,880
£15,000		£3,840
£4,000
2015/2016 to
2016/17		£15,240£15,240£15,240£4,080
2017/2018£20,000£20,000£20,000£4,128
2018/2019£20,000£20,000£20,000£4,260

In the March 2010 Budget the then Chancellor of the Exchequer Alistair Darling announced that in future years the limits would rise annually with inflation, rounded to the nearest £120, to ease the arithmetic for those using monthly payment schemes. From 2013–14 the inflation index used was changed from RPI to CPI.
The Chancellor of the Exchequer George Osborne announced in the March 2014 Budget that the adult ISA limit would be increased to £15,000 from 1 July 2014, and the Junior ISA limit to £4,000. From that date savers were allowed to invest the full amount as cash or stocks and shares, or a mix of both. Savers are also able to switch stocks and shares ISAs to cash ISAs.

Restrictions removed from July 2014

Many restrictions were significantly relaxed from 1 July 2014 and the branding "New ISA" was introduced for this batch of changes:
PEPs became stocks and shares ISAs, with an exemption that allowed them to continue to hold investments that could not be held in a stocks and shares ISA, provided that the investment met the pre-2001 PEP rules.
For some time there were Mini ISAs, Maxi ISAs and TESSA-only ISAs. A Mini ISA could hold cash OR stocks, potentially many if operated by a fund house or platform, while a Maxi ISA could hold cash AND stocks. Any UK resident individual aged 18 or over could invest in one 'maxi' ISA per year, with both components provided by a single financial institution. Alternatively, a person could invest in two 'mini' ISAs, one for each component. The two mini ISAs could be with two different providers if the investor wished.
The TESSA-only ISA was a type of cash ISA funded from a TESSA, another predecessor of the ISA. New TESSAs could not be created after 5 April 1999, so the required five-year term of all TESSAs ended by 5 April 2004. TOISAs were created to allow the original capital invested in a TESSA to be reinvested in a tax-free form.
In the March 2007 Budget the limits for the 2008/9 tax year were increased. From tax year 2008/2009 the distinction between a Mini and Maxi ISA was abolished.
An insurance component was available in both Maxi and Mini ISAs until the 2005/06 tax year. Collective investment funds that once qualified for this component were reclassified as qualifying for either the Cash or Stocks & Shares component.

CAT standards

In April 1999, the Government introduced a voluntary CAT standard for ISAs to make them easier for inexperienced customers to understand and with the intention that lower costs would attract more investors. The standard does not guarantee the investment performance or that investors would buy or be sold the right type of investment.
Many equity funds also meet the CAT standards, but the restriction on costs generally means that these funds are index funds, which require little management and simply follow a given index, such as the FTSE 100 Index.
CAT standards were discontinued by the Treasury on 6 April 2005 following the introduction of the stakeholder product suite, although existing CAT standard ISAs continued on the same terms and conditions.

Similar schemes in other countries

Non-pension products:
Pensions: