ISAs are pretty nifty. Which is probably why the tax-efficient way to save and invest first introduced by Gordon Brown in his role as chancellor in 1999 turns 20 this year. An ISA is basically like any standard savings (cash ISA) or investment (stocks and shares ISA) account. Except that interest, capital gains and income from cash or investments held in an ISA ‘wrapper’ are largely tax-free. Government stats show that ISA savers and investors reduced their collective income tax bill by £2.9 billion last year. Not bad.
ISAs are designed to encourage savings and investment and it seems like they’ve done a pretty decent job at that. The Times newspaper reports that on the 20th anniversary of the ISA approximately four out of 10 UK adults hold one. And they’ve saved and invested a combined £608 billion tax free.
There are 5 different types of ISA offering plenty of flexibility on how you might want to save or invest your annual allowance of £20,000.
How Many ISAs Can I Have?
Over any single tax year, you have the right to divide the £20,000 ISA allowance between up to 4 of the 5 difference ISA types. So you could put £5000 in a Cash ISA, £6000 into a Stocks and Shares ISA, £4000 into a Lifetime ISA and £5000 into an Innovative Finance ISA.
However, you can only hold 1 ISA of a particular type per tax year. If you wanted to switch provider, you could but it would have to be through a transfer that closed the original ISA and opened a new one of the same type with another provider.
You could also, if you wanted to, open 4 new ISAs with a different provider every year. But it is important to keep in mind that holding lots of different ISAs with lots of providers may be inefficient on fees. If you do have different ISAs with different providers opened for different tax years, it may make sense to look into options to consolidate them in one place. There’s a high chance doing so will save you a significant amount in fees over the years and it will also make it easier for you to keep track. As always, research the best offers.
Types of ISAs and Their Limits
As we mentioned earlier, there are now a total of 6 different kinds of ISAs. The two main ISA types are the Cash ISA and the Stocks and Shares ISA. Both have an annual allowance of £20,000 per tax year that can be paid into them, or split between the different types.
The Innovative Finance ISA (IFISA) was introduced in 2016 and allows investors with a greater appetite for risk to invest some or all of their annual £20,000 allowance through the P2P lending market. Peer-to-peer lending means you lend money to individuals or companies through an FCA regulated online intermediary. Certain crowdfunding investments can also be held in an IFISA.
The Lifetime ISA (LISA) was launched in 2017 as a way to support those saving for a deposit for a property or towards retirement. It’s a little different to the other ISA types in that a maximum of £4000 a year can be put into it either as cash or investment. You can still put the rest of your allowance into other ISA types.
The reason it’s allowance is capped so low is that the government tops up payments by 25% to a maximum total of £1000 per year. The only catch is that the funds can only be withdrawn to either make a down payment on a property or after the age of 60, without paying a 25% penalty. The LISA is available up until the age of 40 but can saved into until you are 50.
Finally, the Junior ISA. Designed for parents or guardians of minors under the age of 18, the JISA is the only exception to the £20,000 ISA annual allowance. You can put up to £4368 (from the 19/20 tax year) into a JISA every tax year in addition to your own allowance.