- AJ Bell analysis of search data reveals the most frequently asked ISA questions*
- The fact that people have so many questions reflects the confusion caused by so many rule changes over the years
- There are more changes on the way too – which people need to get to grips with
- Understanding ISAs helps people make the most of the power of the tax-free saving and investing
Sarah Coles, head of personal finance at AJ Bell, comments:
“ISAs have been around since 1999, so it’s easy to assume that everyone else knows all about them. But search data shows that’s not the case: an awful lot of people have unanswered questions. Nobody should feel bad about this, because not only have most people never been taught about these things, but the rule changes have flowed thick and fast, so it’s hard to keep up.
“Next April, the rules are set to change again, with the cut in the Cash ISA allowance for those under 65, an end to transfers from Stocks and Shares to cash, a 22% charge on any interest paid on any cash you hold in Stocks and Shares ISA, and rules around ‘cash-like-assets’. There’s also a consultation out on a replacement to the Lifetime ISA. So even if you knew everything there was to know just a couple of months ago, you might be less certain now.
“If you’re in the dark about any aspect of ISAs, it’s always worth checking trusted sources online and speaking to knowledgeable friends and family. To get started, it can help to check the 15 most commonly asked questions online.”
- What is an ISA?
“It stands for ‘individual savings account’, which doesn’t give much away. ISAs are accounts that make anything inside them free of tax. If you have a savings account, for example, then once you bust your annual personal savings allowance, you have to pay income tax on the interest. If you save in a Cash ISA instead, it doesn’t matter how much interest you make, you never have to pay tax on it.
“Similarly, if you invest outside an ISA, if you bust your dividend allowance you’ll need to pay tax on dividends and if you make more capital gains than your annual exempt amount you’ll need to pay that tax too. Inside a Stocks and Shares ISA, it makes no difference how much you make in profit or dividends, you never have to pay these taxes. However, from 6 April 2027, there will be a 22% charge on interest paid on cash held in a Stocks and Shares ISA. It’s not a tax, but it’ll feel an awful lot like one.
- What are the different types of ISA?
“The Cash ISA: This is basically a savings account within an ISA wrapper, so all your interest is tax free.
“Stocks and Shares ISA: If you use an ISA offered by an investment platform, you can invest in a variety of stocks and funds, and there’s no income tax or capital gains tax to pay on bond investments or dividend tax or capital gains tax on share-based investments. This doesn’t just mean investments grow tax-free, it also means you don’t have to worry about these taxes when you sell and reinvest within the ISA.
“Junior ISA: These are for children under the age of 18. Their parent or guardian can open an account in their name, and then anyone can pay into it. The money is tied up until the child is 18, and then it belongs entirely to them. It has the same tax benefits as the adult version. You can get Cash versions and Stocks and Shares versions, although over a long time period like 18 years, investment is often a sensible choice as it offers more growth potential.
“Lifetime ISA: If you’re aged 18-39 you can open a Lifetime ISA, and use it to save or invest for your first property – or for retirement from the age of 60 – or both. You can pay in up to £4,000 a year up to the age of 50, and the government will top it up by 25% - so that’s up to £1,000 of free money every year from the government. The government is consulting on replacing the Lifetime ISA, but until they make the change, you can still open them, and use them for life.
“You can withdraw the money at any time, but if you do so for any reason other than buying a first property worth up to £450,000 or after you turn 60, you’ll pay a 25% penalty. This doesn’t just involve removing the government bonus, you’ll lose some of your own money too. Say, for example, you put in £4,000 and the government topped it up to £5,000 and then you withdrew it, you’d pay 25% of £5,000 – so you’ll only end up with £3,750.
“Innovative Finance ISA: These are niche products that allow you to invest in some alternative assets including peer-to-peer loans and crypto exchange traded notes.
- What is the annual ISA allowance?
“You have an annual overall allowance of £20,000 each year. This year you can put it all into a Stocks and Shares ISA or all into a Cash ISA, or mix and match. From next April, you will only be able to put in a maximum of £12,000 into the Cash ISA (those aged 65 and over can still put in £20,000 a year), although you can still use the rest of the £20,000 allowance for stocks and shares.
“If you have a Lifetime ISA, the £4,000 allowance comes out of the overall £20,000 limit. So if you put £4,000 into a LISA, you could only put £16,000 into a Stocks and Shares or Cash ISA.
“Children have a £9,000 Junior ISA (JISA) allowance each year. It doesn’t matter how many JISAs each adult pays into, or how many adults pay into one JISA, as long as no more than £9,000 goes into each child’s JISAs overall.
- Can I have more than one ISA?
“Yes. As an adult you can pay into as many ISAs of as many different types as you want during the tax year, as long as you don’t bust the annual allowance.
“Different rules apply to Junior ISAs. Each child can only have one Junior Cash ISA and one Junior Stocks and Shares ISA at any time.
- Can you have a joint ISA?
“No, but there’s nothing stopping you from having a joint savings goal with someone, and each paying in an agreed sum to your own ISAs. You can have joint plans without needing a specific joint product.
- How do I open an ISA?
“It starts with the kind of ISA you want – whether you’re saving or investing, and whether it’s for a property, retirement or a child.
“Next you pick a provider. For a Cash ISA, this will be about finding the best possible rate on the kind of account you need – whether that’s an easy access account or one that’s fixed for a period. You also need to consider whether you’re likely to want to withdraw and top up the account, in which case you may want a flexible ISA. If it’s not flexible, every top up will use more of your annual allowance.
“For a Stocks and Shares ISA it’s worth checking who tends to be recommended by independent organisations. Then see whether they let you invest in the things you want, what the charges are like, and the support that’s on offer. There’s a full spectrum and a range of costs, so it’s about finding what works for you.
“Once you know what you want, you can visit the company website and click ‘open an ISA’. If it’s a brand new ISA, you’re going to fund with cash, you need your National Insurance number, your bank details and your debit card details. If you are transferring, you also need details of the ISA you have elsewhere.
- What kind of assets can I hold in an ISA?
“Cash ISAs are for cash savings. Stocks and Shares ISAs allow a huge number of assets including individual shares listed on any recognised stock exchange, bonds (where you invest in company debt) and gilts (investing in government debt). You can also invest in a number of different kinds of funds, including investment trusts and exchange traded funds. These might hold shares, bonds, gold or commercial property, so you can get exposure to all kinds of things in an ISA. You can’t hold cryptocurrency, but you can hold shares in related companies, or funds that invest in related companies. If you want to hold a cryptocurrency exchange traded note in an ISA you would need to do that through an Innovative Finance ISA.
“You can hold cash in a Stocks and Shares ISA, although from next April you face a 22% charge on any interest paid on this money, so if you want to hold cash for a significant period, a Cash ISA may be a more sensible option.
- Can I buy individual US stocks in a UK ISA?
“Yes, but there will be withholding tax on dividends. The main rate is 30%, but the US and the UK have a tax agreement, so you can complete form W-8BEN (you usually need to do it every three years), which will lower the rate to 15% in your ISA.
- How much will £20,000 make in an ISA?
“In a Cash ISA it will depend on the interest rate on offer, so for example if you got 4% interest a year you could make £815 in interest over 12 months. With a Stocks and Shares ISA, there are no guarantees. It will depend on what you invest in and how it performs over that period. Over the long term it should grow more than cash, but it will rise and fall in value over the short term.
- How can I transfer an ISA?
“It’s vital not to withdraw from an ISA to move the money, or it will come out of the wrapper and you will have to use this year’s ISA allowance to wrap it up again. Instead, open an ISA with the company you want to move to, and during the application process, complete the section that says you want to transfer – you’ll need details of where your money is right now. The new provider will do the rest.
- Can you withdraw from an ISA?
“Yes. You can usually withdraw at any time from any kind of ISA. There are some exceptions, such as if you have a fixed rate Cash ISA that ties up your money for a specific time, or if you have an Innovative Finance ISA and your money has been loaned out there could be a delay in getting your money back. For a Lifetime ISA you will have a 25% withdrawal penalty charge if the withdrawal is before your 60th birthday and you’re not using it to purchase your first home. For everything else, there are no restrictions on withdrawals.
“If you want to pay money back into your ISA within the same tax year, you’ll need a flexible ISA, otherwise it counts as using some of this year’s annual allowance.
- Do I pay tax on ISA withdrawals?
“There’s no tax on ISA withdrawals. It’s one of the reasons it can be so helpful to hold ISAs alongside your pension in retirement, so you can top up your income without paying any additional tax.
- Are there any risks of investing in an ISA?
“You take the same risk as with the same investments outside an ISA. Investments can rise and fall in value, and you can get back less than you invest. However, there are also ways of reducing the risk, such as drip-feeding money in over time, and spreading your investments over a number of different funds – and different assets. It means that if one of your investments doesn’t do so well, the performance of others can often help make up for it. It’s important not to underestimate the risk involved in investing, but it’s vital not to over-estimate it either.
- Is your money safe in an ISA?
“If you save in a Cash ISA, you have protection from the Financial Services Compensation Scheme. It means that if anything happens to the company running the ISA, the first £120,000 you have with each institution is protected. Just check that savings and ISAs with different banks don’t have the same underlying institution.
“If you invest in a Stocks and Shares ISA, your money is ringfenced, so if something was to happen to the company offering the ISA, your investments would be protected. However, this is entirely separate from investment risk. As with any other investments, you can still lose money if your investments perform poorly.
- Does HMRC know if you have an ISA?
“Yes, because ISA providers have to submit the information to HMRC. It doesn’t necessarily happen quickly, so if you were to make a mistake and accidentally pay too much into ISAs in one year, for example, it may take a while for HMRC to spot it. However, they will eventually, and you may end up paying tax on money you made in the interim.”
*Source: Most asked ISA questions based on data from Google Search Console, Semrush and Peec AI
