2019 marks the 20th birthday of one of the UK’s most popular savings products. The first Individual Savings Account (ISA) became available in 1999 and, since then, it has captured the imagination of British savers.
According to Hargreaves Lansdown, £8.74 trillion has been invested in ISAs and an estimated £30 billion has been saved in Income Tax alone. So, to celebrate the ISA’s 20th birthday, here’s everything you need to know about the tax-free product.
A brief history of the ISA
In the late 1990s, British consumers had a choice of two tax-free products: the Personal Equity Plan (PEP) and the Tax-Exempt Special Savings Account (TESSA).
In his budget of March 1999, then chancellor Gordon Brown introduced the new account. He said: “The government wants to encourage people to save both to underpin long-term investment and to secure their own financial welfare for the future.
“The aim of ISAs is to extend the savings habit to half the population that has little or no savings at the moment.”
When the ISA was launched the maximum you could save was just £7,000, of which £3,000 could be saved in a Cash ISA. Since then, the allowances have risen sharply, to £10,200 in tax year 2010/11, £15,240 in 2015/16 and to the current level of £20,000 in 2017/18.
If you’d saved the maximum into your Cash ISA since the product was launched, you’d now have a £141,520 pot – plus the interest it had earned.
And, according to Sarah Coles, Personal Finance Analyst at Hargreaves Lansdown, if you had invested your full allowance since launch in the Legal & General UK Index Tracker, you would have invested £211,320 and be left with a savings fund of £341,982.
In addition to higher allowances, ISAs have also evolved in other ways:
- Better tax breaks
- More flexibility
- A wider choice of investment options
- ISAs for children
- ISAs with government bonuses
The choice of different types of ISA has also widened in recent years, and here we look at your current options.
The 2019 ISA range
There are six types of ISA currently available.
1. Cash ISA
A Cash ISA is a simple savings account where you receive every penny of your interest tax-free. And, any interest that you do earn doesn’t count towards your personal savings allowance.
There are many different types of cash ISA available including:
- Instant access
- Fixed rates
- Regular savings
Any UK resident over the age of 16 can open a Cash ISA, and you don’t have to pay to open one.
2. Stocks and Shares ISA
With a Stocks and Shares ISA, you can invest in a huge range of funds featuring shares, bonds and other investments depending on your attitude to risk.
Your Stocks and Shares ISA will typically be managed by an online service/platform, a fund management group or a fund supermarket. There may be charges for opening and holding a Stocks and Shares ISA.
Some ISA providers will let you hold some of your annual ISA allowance in cash within your Stocks and Shares ISA, or you can open separate accounts if you prefer (just don’t exceed your annual limit!). You need to be a UK resident aged 18 or over to open this type of ISA.
The advantages of holding a Stocks and Shares ISA include:
- You don’t pay any tax on the interest earned on bonds
- You don’t pay any Capital Gains Tax on profits made from increases in the price of shares you hold in your investment
- You don’t pay tax on dividends.
3. Lifetime ISA
Lifetime ISAs are a relatively new addition to the ISA family, having been launched in April 2017. With a Lifetime ISA, you can save up to £4,000 a year (either a lump sum or regular savings) and use the proceeds either as the deposit for your first home or for your retirement.
The main advantage of a Lifetime ISA is that the government adds a 25% bonus to your savings. So, if you save £1,000, you’ll get an additional bonus of £250. This bonus is paid until you reach age 50, and is based on your contributions to the Lifetime ISA. At present, the maximum bonus is £33,000 although to achieve this you’d have to open one on your 18th birthday and contribute the maximum £4,000 each year until you reach age 50.
Note that contributions to a Lifetime ISA form part of your overall ISA allowance. So, if you contributed the maximum £4,000 to your Lifetime ISA in the 2019/20 tax year, you could only invest £16,000 in other ISA products.
You must be a UK resident aged between 18 and 39 to open this type of ISA. Remember also that if you withdraw your savings before the age of 60 and it’s not to buy your first home, you’ll pay a 25% penalty.
4. Help to Buy ISA
The Help to Buy ISA was launched in 2015 and aimed at helping first-time buyers save their deposit. You can save up to £1,200 in the first month and then up to £200 a month after that. As a Help to Buy ISA is a form of Cash ISA, you can’t also open a Cash ISA in the same tax year (although some providers let you split your allowance between the two products).
When you come to buy your first home, the government will add a 25% bonus (up to a maximum of £3,000) to your savings.
Note that new Help to Buy ISAs can only be opened until 30 November 2019.
5. Innovative Finance ISA
An Innovative Finance ISA can be a lot of different things, including:
- Lending to businesses
- Peer-to-peer lending
Investing in an Innovative Finance ISA means that any interest you make from lending money to businesses or individuals isn’t taxed.
This type of ISA is generally considered riskier than other types of ISA, as because you’re lending money there is a chance that the borrower won’t repay. This risk can be mitigated by choosing investments which spread your cash over a range of loans.
6. Junior ISA
In 2011, the Junior ISA replaced the Child Trust Fund as a method of saving for children. This means a Junior ISA is only available to a child born after 3 January 2011, or a child aged under 18 but born before 1 September 2002, when the Child Trust Fund was introduced, and so never had the chance to contribute to a Child Trust Fund.
You can currently save up to £4,368 in a Junior ISA, and you can divide this allowance between cash, and stocks and shares in any way you wish.
Your child can’t access the savings until they are 18 years old, even though the account is in their name. And, your child can only hold a Cash or Stocks and Shares Junior ISA with one provider, meaning you keep adding to your investment with the same provider every year. You can transfer your child’s Junior ISA to another provider if you wish.
Get in touch
Want advice about your ISAs, pensions or other investments? Get in touch. Email firstname.lastname@example.org or call 01454 416 653.