Are you making the most of your tax-free ISA allowance?
Consider opening more than one ISA to diversify your savings and match your financial goals.
How many ISAs can I have?
You can have as many ISAs as you like as long as you don't exceed your £20,000 ISA allowance in any given tax year.
From April 2024, you'll be able to open multiple ISAs of the same type, although the ISA allowance has remained unchanged.
Having more than one type of ISA can help you achieve different financial goals.
So how do ISAs work?
An individual savings account (ISA) is a tax-efficient wrapper for your savings.
You can use your ISA each year to protect your money from income tax, capital gains tax, and dividend tax.
The limit is £20,000 per year. You can allocate your entire allowance to one type of ISA or spread it across the different types that we’ll look at shortly.
Although you can have lots of different ISAs, you can currently only open and contribute to one of each type in a tax year – within your annual allowance.
This rule will change from April 2024, so you can open multiple ISAs of the same type without losing your ISA allowance.
It’s important to remember that if you don’t use your full ISA allowance in a tax year, you can’t carry it over to the next one. So, it’s a case of ‘use it or lose it’.
Also, you can switch ISA providers, but the money must go directly from one ISA provider to another.
You can’t put the money into another form of savings account before paying it into a new ISA.
Once your money’s invested, that’s it.
You are entitled to tax-free savings, and you don’t have to declare them on your self-assessment tax return.
Learn more: ISAs vs savings accounts
What are the different types of ISA?
There are five different types of ISA. Here’s a brief description of what they are and who they’re for.
If you seek total simplicity in your savings strategy, this could be the ISA for you.
It’s very straightforward. It’s essentially a cash savings account with that big added bonus of not having to pay tax on any interest you earn.
You can pay in up to £20,000 a year and choose between instant access or fixed term.
Stocks and shares ISA
This type will suit you if you are comfortable with slightly more risk than you get with a cash ISA but still seek simplicity.
You can often set it up online, and it gives you access to a range of investments – depending on the exact product and provider.
The key point here is that you are exposed to the ups and downs of the markets, so it’s possible that could end up with less money than you started with.
Lifetime ISAs were introduced in April 2017 and designed to help young people save for their first home or retirement. This can be a cash or stocks and shares ISA.
To open one, you need to be aged between 18 and 40 and can invest up to £4,000 of your yearly allowance in the ISA each year.
The government will give you a bonus of 25% of your contribution, up to a maximum of £1,000 a year, and unless you use the funds to buy your first home, the earliest you can access the money is at age 60.
It's worth flagging there's a 25% withdrawal charge if you make an unauthorised withdrawal.
Learn more: what is a lifetime ISA and how does it work?
Innovative finance ISAs
Another recent ISA type, the innovative finance ISA allows you to invest in peer-to-peer lending.
This means you’re lending money directly to borrowers in return for interest.
Your whole £20,000 allowance can be invested, but because of the loan element of this ISA, you might not be able to access your funds instantly.
One important detail to bear in mind – this ISA is not protected by the Financial Services Compensation Scheme, so you could lose your money from a company that goes bust.
From April 2024, you'll be able to include long-term asset funds and open-ended property funds with extended notice periods in an Innovative Finance ISA.
The account must be opened by a parent or guardian, but after this, anyone can contribute.
The money is held in the name of the child - so will not use up any of your £20,000 ISA allowance - and can be withdrawn once the child is 18.
At this point your provider will get in touch about converting the account into an ‘adult’ ISA of some kind.
Can I transfer my money from one ISA to another?
Whether an ISA transfer is allowed or not depends on the accounts and the provider.
Transferring an ISA is different to withdrawing from an account and depositing money into another.
If you withdraw money and then deposit, your funds will lose their tax free status.
If you have any questions about which ISA might be right for your individual circumstances, it’s always a good idea to contact a financial adviser, who will recommend the best course of action.
Unbiased can connect you to an independent financial adviser that is regulated by the Financial Conduct Authority (FCA) and can help you achieve your goals.