The UK was a different place in April 1999. Artists like Ricky Martin and The Corrs were topping the charts, the London Eye was still a building site, and you likely had a Nokia phone in your pocket.
It was also the year that Gordon Brown introduced the Individual Savings Account (ISA). Since then, they’ve become an integral part of the UK savings and investment landscape – AJ Bell reports that nearly £750 billion is held in ISAs owned by UK adults.
In April 2024, the ISA turned 25, so what better time to dive into the story of ISAs, and learn about their many benefits?
The ISA replaced the Tax-Exempt Special Savings Account and the Personal Equity Plan
ISAs allow you to save and invest without paying Capital Gains Tax (CGT), Income Tax, or Dividend Tax on your interest or returns. This can make them a powerful part of your savings and investment portfolio.
However, they weren’t the first tax-efficient accounts available in the UK. The Tax-Exempt Special Savings Account (TESSA) and the Personal Equity Plan (PEP) both offered tax breaks but were phased out upon the introduction of the ISA.
Note, please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
Over the years we have seen several different types of ISA
Since 1999, several different types of ISA have been introduced. As of 2024, four remain for adults, each with unique benefits.
- A Cash ISA lets you earn tax-free interest with minimal risk to your savings
Cash ISAs are similar to traditional savings accounts, but any interest you earn will be tax-free. Because your savings are held in cash, risk is minimal and you can normally access your money quickly and easily. This type of account is useful if you’re saving for short-term needs.
- A Stocks and Shares ISA offers the potential for higher long-term returns
Stocks and Shares ISAs give you great flexibility to invest in various ways, from individual stocks to a wide range of funds. This could give you the potential to generate more robust long-term growth, and you don’t pay CGT, Income Tax, or Dividend Tax on any profits you make.
Considering that the government has recently reduced the amount of dividends and gains you can earn from non-ISA investments before you pay tax, this makes investing in an ISA an even more attractive proposition.
Remember that, with a Stocks and Shares ISA, the value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Over time, these potentially higher returns could compound, boosting the value of your ISAs. Indeed, This is Money reports that, by using their full annual allowance to invest in Stocks and Shares ISAs, more than 2,700 people have accrued ISA wealth worth over £1 million.
- Lifetime ISAs can help you save for a first home or retirement
A Lifetime ISA (LISA) is designed to help you save up for your first home or later life. You can open a LISA if you’re aged between 18 and 39, and you can save or invest up to £4,000 a year (2024/25). The government will provide a 25% top-up on any deposits you make into a LISA up to an annual bonus of £1,000. You’ll also benefit from tax-efficient growth on your savings.
Note that if you withdraw funds before the age of 60 for any reason other than the deposit on your first home, you’ll pay a penalty.
- Innovative Finance ISAs are specialist and high-risk
Innovative Finance ISAs can include peer-to-peer loans and crowdfunding ventures. They’re a specialist option and your capital will be at risk. As such, if you’re interested in investing in an Innovative Finance ISA, it’s wise to seek advice.
- You can save for your children using Junior ISAs
If you’re looking to save for a child or grandchild under 18, you could consider a Junior ISA (JISA). A JISA offers the same tax benefits as an adult ISA, and you can contribute up to £9,000 a year (2024/25).
You can choose either Cash or Stocks and Shares options. When the child turns 18, the ownership will pass to them. At that time, they can withdraw the cash or transfer the funds to an adult ISA and continue to enjoy tax-efficient savings.
The government made several changes to ISAs in 2024 and announced the British ISA
Before the 2024/25 tax year, you could only pay into one ISA of each type in a tax year. However, as of 6 April 2024, the government has simplified the rules. Although you can still only invest in one LISA each year, you can now contribute to multiple types of the same ISA in a tax year up to a total subscription limit of £20,000 (2024/25).
This provides several benefits
- You can open a new Cash ISA if a better rate becomes available without closing an existing account or waiting until the next tax year.
- You can transfer a portion of your ISA from one provider to another, no matter when the money was paid in.
- You can take advantage of different rates and exposures available through different ISA providers.
In the 2024 Spring Budget, Jeremy Hunt also announced plans for a new UK or British ISA.
The UK ISA will allow you to invest a further £5,000 in addition to the existing £20,000 (2024/25) limit and provide a tax-free way to invest in UK companies. Consultation for the UK ISA will run until 6 June 2024.
Get in touch
If you’re keen to make the most of tax-efficient savings and investment opportunities, Amber River can help. Call us on 0800 915 0000, or alternatively use our contact form here to set up an initial appointment.
Disclaimer:
The information within this article was correct at the time of publishing, but laws and tax rules are subject to change. Your circumstances and where you live in the UK also have an impact on tax treatment.
