Your guide to a tax-efficient ISA.
What is an ISA?
An Individual Savings Account (ISA) allows you to save or invest money in a tax-efficient way.
You can put your overall ISA allowance to work by shielding your invested fund’s potential growth from Income Tax Capital Gains tax and tax on dividends, helping to maximise the potential returns you make on your money. It’s important to remember that tax rules can change at any time.
ISA history and allowances.
ISAs were introduced on April 6, 1999, replacing the earlier Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs).
When they launched, the ISA allowance was split between stocks and shares and cash – for the tax year 1999/00, the allowance was £7,000 for a Stocks and Shares ISA and £3,000 for a cash account. In 2014, changes came into play that essentially split the subscription limit between the two types of ISA. This allowed you to distribute money across ISAs in a way that suits best. Whilst you can split your overall ISA allowance between a Stocks and Shares ISA and Cash ISA, you can only contribute to one of each type per tax year. Meaning that you could only contribute to one Stocks and Shares ISA and one Cash ISA if you choose to split your allowance.
The ISA allowance for the current tax year (2024/25) is £20,000*, which it has been since 2017/18.
The different types of ISAs available for investment.
There are 4 types of ISAs:
Cash ISAs are savings accounts that pay interest free of Income Tax. As with other ISAs, there are limits on the amount of cash you can deposit in each tax year.
You can only open one Cash ISA a year, but it is possible to transfer to another Cash ISA or a Stocks and Shares ISA with another provider during the tax year. Anyone over the age of 16 can open a cash ISA.
A Stocks and Shares ISA is a tax-efficient way to invest your money as any profit is exempt from Capital Gains Tax. This type of account lets you put money into range of different investments.
A Stocks and Shares ISA could be an investment option if you aren’t looking for immediate access to your money and are prepared to keep your money invested for a number of years. With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest.
An Innovative Finance ISA (IFISA) is a type of ISA that allows you to use your tax-free ISA allowance while investing in peer-to-peer lending.
Online peer-to-peer lending platforms connect investors with individuals, businesses or property developers that are looking for loans.
The benefit of an IFISA is that any interest you earn from your P2P loans within it is completely free of tax.
This ISA typically offer higher interest rates than those available on cash ISAs or other types of savings accounts, however, the level of risk varies from platform to platform and a return is not guaranteed.
You can use a Lifetime ISA to buy your first home or save for later life. The maximum allowance you can use is £4,000 each year, until you’re 50, while the government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.
You can use your savings to help you buy your first home if all the following apply:**
- The property costs £450,000 or less
- You buy the property at least 12 months after you make your first payment into the Lifetime ISA
- You use a conveyancer or solicitor to act for you in the purchase – the ISA provider will pay the funds directly to them
- You’re buying with a mortgage
**Criteria up-to-date as of 11/03/24: https://www.gov.uk/lifetime-isa
Using your tax-free allowance to reach your goals.
Take the next step towards your financial goals by using your tax-free allowances before April 5th. By using your tax-free ISA allowance, you can give your investments more opportunity for potential growth and protect your invested funds from Income and Capital Gains Tax.
You do not pay tax on:
- Interest on cash in an ISA
- Growth on your investments held in an ISA
Every tax year you can save up to £20,000 in one type of ISA account or split the allowance across some or all of the other types.
Additionally, you can also pay £4,000 into your Lifetime ISA in a tax year. This allowance is separate from the tax-free ISA allowance.
The tax year runs from April 6th to April 5th.
How to take advantage of your ISA allowance today.
If you are a client with True Potential, you can login to your True Potential app or online account and access your Stocks and Shares ISA.
Once in, tap impulseSave® to top up from £1 or ‘Max my ISA’ to invest your remaining allowance. Confirm your details and we’ll process the contribution, it’s that simple.
For further support with your ISA allowance, you can call our Relationship Management team on 0191 500 9164.
They’re available 7am – 8pm weekdays and 8am – 12pm on Saturdays.
If you’re not a client but want more information about how you can invest with True Potential, you can call one of our experts on 0191 625 0350 to learn more.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Tax is subject to an individual’s personal circumstances, and tax rules can change at any time. ISA eligibility and tax rules apply.
You should ensure your contribution does not result in your total ISA contributions within the tax year exceeding £20,000.
This blog is for information only and is not personal financial advice.
*Current ISA allowance: https://www.gov.uk/individual-savings-accounts
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