Quite an innocuous title but ISAs (Individual Savings Accounts) are a particularly useful planning opportunity, often mis-understood or undervalued.

Tax is something that most people would like to pay less of but at the same time, appreciate it’s a part of life. When there are opportunities to reduce your tax liability, with a simple, widely available account, why wouldn’t you? All gains within an ISA are free from tax.

The Personal Savings Allowance (PSA) was introduced in 2016, which allows basic rate tax payers, to earn up to £1,000 of interest per tax year and it not be liable to income tax on that interest. For higher rate (>£50,270) that reduces to £500 per tax year and additional rate (>£125,140) it’s zero.

According to a recent survey by Shawbrook Bank, in 22/23, 3.3 million savings accounts earned more than £1,000 in interest and therefore, likely to be subject to income tax.

I’m an advocate of ISAs and this blog is aimed at dispelling 5 myths with respect to ISAs.

ISAs are just for cash savings

Wrong! Cash ISAs are the most common type of ISA. For years, with interest rates hovering around 1%, many people saw little benefit in sheltering money within an ISA, without necessarily considering where rates / returns might go and associated tax consequences. You can invest too, through a Stocks & Shares ISA, retaining the tax benefits and broadening the opportunities for your money. Lifetime ISAs can be opened if you’re under the age of 40 and offer additional opportunities to save towards your first house, or retirement, but there are rules and points to consider.

Don’t forget, ISAs are available for children too, called Junior ISAs.

Don’t you need lots of money to make an ISA worthwhile?

No! Money is relative, but if you have £30,000 in a cash savings account, earning 4% interest, over a year that would generate interest of £1,200. That means you’re liable to tax on the interest over & above your PSA, at your marginal tax rate (e.g. 20%/40%/45%). If you were in a fortunate position to save £20,000 per annum, and you did it for 5 years, and NOT used an ISA, with £100,000 earning 4% = £4,000 of interest. At least £3,000 of that is taxable and if you’re saving >£20k p/a, it’s likely that you are at least a higher rate tax payer, meaning a further tax liability of £1,400.

Aren’t ISAs complicated?

Nope! Most banks & building societies offer ISAs and likewise, many online investment platforms (e.g. Hargreaves Lansdown, Interactive Investor, AJ Bell) offer them. It’s typically a case of opening an account and transferring some money. It’s then within the ISA ‘wrapper’ and immediately sheltered from any potential income or capital gains taxes. You can typically transfer ISAs from one institution to another and providing you don’t make a withdrawal to facilitate the transfer, it will retain the ISA tax benefits.

Isn’t my money tied-up within an ISA?

Negative! There are fixed-term ISAs, but unless you have certainty knowing that you don’t need access to the money, I think the benefits of flexibility that most ISAs cash & stocks & Shares ISAs will offer, is hugely beneficial. Withdrawals from ISAs are tax free, meaning that other than if you use a fixed-term account, you could access your ISA money, as & when. For example, I moved house in 2023 and it wasn’t planned, hence we needed to access our ISAs, which we could, without a tax penalty.

There is also the principle of ‘Flexible ISAs’. For example, if you contribute £20,000 into an ISA and then want to make a withdrawal of £10,000, for non-flexible ISAs, you can’t ‘re-contribute’ again within the same tax year. However, a flexible ISA allows you to withdraw the £10,000 and the ability to put that £10,000 back into the ISA, without it counting towards that tax year allowance.

ISA providers are not bound to having to offer a Flexible ISA, so take the time to check.

Contributions are limited, so it’s not worth it.

Contribution limits have been at £20,000 per adult, per tax year for some time. If you have a partner/spouse, then you have an additional allowance to consider. For example, if you inherited £100,000 then you could have 80% (£80,000) of it within the tax-free ISA environment within 2 tax years, between 2 people. Continue to save & use your allowances as best you see fit, then the capital that is sheltered from tax will grow and could form a particularly useful cornerstone of your financial planning.

If you would like to understand more about the potential of ISAs and how they can fit around, get in touch, we’d love to chat.

Thanks for reading and enjoy the journey!