A tax-efficient way to save or invest up to £20,000 this tax year, with a huge range of investment options to choose from.
What is an ISA?
An ISA is a way to get special tax breaks when you save or invest. It isn’t an investment; it’s what’s referred to as a wrapper scheme. It’s a way of setting up an account or investment so it can benefit from certain tax breaks.
You can invest in most investment companies through an ISA, getting all the benefits of a diverse portfolio and an experienced investment manager, with extra tax relief.
For more information, download our consumer guide on Investment companies and Individual Savings Accounts (ISAs)
What can you invest in?
There are two types of eligible investment:
- cash – bank and building society savings accounts, National Savings, etc
- stocks and shares – investment companies, unit trusts, shares, bonds and so on
You can make either or both types of investment through an ISA each year.
How much can you invest in an ISA?
There is a limit to how much you can put into an ISA each tax year and this tax year the limit has increased considerably to £20,000.
A tax year runs from 6th April one year to 5th April the following year. For the period 6th April 2019 to 5th April 2020, the ISA limit is £20,000.
In each tax year, you can subscribe to one cash ISA and one stocks and shares ISA at the same time but this doesn’t affect the limit – the £20,000 must be split between them.
You can invest as much of this allowance in either cash or stocks and shares as you wish. For example, you could choose to open a cash ISA with £5,000 and then invest up to £15,000 in a stocks and shares ISA in one tax year. Alternatively, you could invest 100% of the allowance into stocks and shares, or 100% into cash.
What are the tax benefits?
- You don’t pay income tax on the income from your ISA – this includes income from dividends and interest.
- You don’t pay capital gains tax on the growth of your ISA.
- You don’t have to declare an ISA on your tax return.
On top of the extra value you get out of your investment, ISAs can lead to other tax benefits, depending on your situation.
- If you’re on the threshold between two income tax bands, investing within an ISA could keep you in the lower band. It means that your taxable income is lower, though your overall income might be similar to if you’d invested outside the ISA.
- If you’re over 65, income you get from investments held within an ISA won’t erode the higher personal tax allowance you get.
- If you’re a higher rate tax payer, the dividends and interest from your ISA doesn’t get included when you pay the extra tax levied on this income.
ISAs and capital gains tax explained
Capital gains tax is a tax you pay when you sell, give away or otherwise dispose of assets. At its simplest, you pay tax on any profit you get when you sell something you own – for example, your shares.
Usually if you make a loss on something, you can offset it against your gains and pay less tax – so if you sold some shares at a profit and some at a loss they would cancel each other out. But ISAs are completely free from capital gains tax. You don’t pay tax if you make money, and you can’t offset any losses you make against your other gains.
What investments qualify to be in an ISA?
There are strict rules about which investment companies and other investments can be included in an ISA. For investment companies, one rule is that the investment company’s own shares must be listed on an official list of a recognised stock exchange or admitted to trading on a recognised stock exchange. Investment companies which are quoted on the Alternative Investment Market (AIM) are also eligible for inclusion in an ISA.
The vast majority of investment companies qualify as ISA investments and you can find more information on these companies on our website.
Transferring an ISA
If you’re not happy with the types of ISA you’ve invested in you are allowed to make changes and transfers.
- If you have a cash ISA you can transfer the money into a stocks and shares ISA.
- You must move the whole of your current year's cash ISA, but can split previous years’ between different ISA managers
- You can’t transfer any money from a stocks and shares ISA to a cash ISA.
- You can transfer your ISA to another ISA manager.
You must get your ISA manager to handle the transfer – you can’t take the money out of the old ISA and put it into a new one yourself. Check the terms and conditions with your ISA manager to find out if you will be charged for transferring.
If you accumulate several ISA schemes over the years, you should review them from time to time, in case your investment needs have changed or the funds that you’ve been investing in haven’t performed as well as you expected.
Changes to tax law
HM Revenue & Customs tax levels and tax reliefs change over time. If you’re not sure of your tax status, get independent advice from a professional financial adviser, solicitor, accountant or stockbroker.