If you’re looking for an efficient way to earn interest, Individual Savings Accounts (ISAs) are a great way to get more from your savings, as they’re tax free and don’t count towards your Personal Savings Allowance.
There are some new rules coming into effect for the 2024/25 tax year though, which begins on 6 April 2024. So, let us guide you through what you should be aware of if you’re thinking about opening an ISA.
ISA savings explained
As we mentioned, the key benefit of an ISA is that any interest, dividends, or capital gains you earn within your ISA aren’t subject to tax. This includes income tax, capital gains tax, or dividend tax. And that’s regardless of your income tax bracket.
Each tax year, everyone has an annual ISA allowance. For the 2024/25 tax year, this is £20,000. There are several types of ISAs, each with their own rules and features, including:
- Cash ISAs are similar to the standard savings accounts you’re probably familiar with. But they have the advantage of allowing you to save tax-free. They may be of interest to people who prefer lower-risk savings.
- Stocks and Shares ISAs allow you to invest in a range of assets, including stocks, bonds, and funds. They have the potential for higher returns than a Cash ISA but, as with all investments involving stocks, bonds and funds, they come with a higher level of risk as their value can fall as well as rise.
- Innovative Finance ISAs allow you to invest in peer-to-peer lending platforms and other alternative finance options. Again, compared with Cash ISAs they have the potential for a higher return but come with increased risk.
- Lifetime ISAs are designed for saving either for a first home or for later life. The government will also add a 25% bonus to your Lifetime ISA savings, up to a maximum of £1,000 each year, which is helpful. However, there are penalties if you withdraw funds for any other purposes.
- Junior ISAs are, unsurprisingly, for children under 18 and can be opened and managed by a parent or guardian. They have lower contribution limits and cannot be accessed until the child reaches 18.
Overall, ISAs can be a valuable way to save or invest money in a tax-free way and generally give you the flexibility to transfer your money between ISA providers without losing the tax benefits.
However, certain types of ISA, such as Lifetime ISAs, may feature penalties for early withdrawals. So, as with any financial product or service, it’s important to make sure you’re clear on the specific terms and conditions of the account you’re considering opening before you commit.
How do Cash ISAs work?
Cash ISAs are a form of savings account offered by banks and building societies in the UK. Here at Suffolk Building Society the only type of ISAs we offer are Cash ISAs. As with all ISAs, their primary benefit is that any interest you earn is tax free.
Just as there are different types of ISAs, there are also different types of Cash ISAs. They include easy access, fixed rate, and regular savings options. Each type has its own features, such as the interest rate, level of access to your funds, and potential penalties for early withdrawal.
As you’d expect, Cash ISAs offer interest on the money you deposit. Interest rates can vary depending on the type of Cash ISA, the provider you choose, and the current market conditions. Some Cash ISAs will offer a variable interest rate which can change over time, while others offer fixed rates where your interest rate is set for a specific time.
In comparison with other types of ISAs, Cash ISAs tend to offer more flexibility in terms of accessing your money. However, some may feature restrictions or penalties for early withdrawals. This is especially relevant for fixed-rate ISAs where you’ve agreed to save your money for a set period, so think carefully about which one could work best for you.
Changes to ISA rules
From the start of the new tax year on 6 April 2024, the government is introducing a range of reforms to ISAs to make them easier to manage. These include:
- Increasing the age you need to be to open a Cash ISA from 16 to 18 years old. This makes them consistent with the existing age requirements for Stocks and Shares, Innovative Finance and Lifetime ISAs.
- If you were already aged 16 or 17 on the 5 April 2024, you can apply for or transfer a single adult Cash ISA. If you become 16 after this date, you cannot open an adult Cash ISA until you are 18.
- Allowing people to open multiple ISAs of the same type in the same tax year, with more than one provider. The only exceptions to this rule are Lifetime and Junior ISAs.
- Remove the requirement for people to make a fresh ISA application where an existing ISA account has received no subscription in the previous tax year. However, you will still need to complete an application, where you are a non UK resident returning to the UK.
- Allow partial transfers of your current year ISA subscriptions between ISA providers (more on this below).
ISA allowance 2024/25
One aspect of ISAs that isn’t changing in the new tax year is your annual ISA allowance. As with previous years, the maximum amount you can invest in ISAs in a single tax year is £20,000. This allowance applies regardless of the type and number of ISAs you open. Junior ISAs have a lower annual limit of £9,000 though.
You can spread your allowance across more than one type of ISA and multiple ISAs of the same type. You can also stick with a single type, such as a Cash ISA, if you prefer.
It’s also worth noting that if you haven’t used your ISA allowance for the 2023/24 tax year and would like to, you have until the 5 April 2024 to do so.
Cash ISA allowance
Your Cash ISA allowance is included in your overall annual ISA allowance of £20,000 per tax year.
How many Cash ISAs can I have?
The new rules for 2024/25 remove the limit on opening more than one Cash ISA per year. This rule applies to other types of ISA as well, aside from Lifetime ISAs and Junior ISAs. However, you’ll still need to stay within your £20,000 annual limit across all your ISA investments.
Can you split your ISA allowance between different providers?
Yes, under the new rules you can split your annual ISA allowance between various types of ISAs and open ISAs with a range of providers. This doesn’t apply if you are under 18.
ISA transfer rules
Currently, it’s possible to transfer an existing ISA from one provider to another without losing your savings tax-free status. It’s also possible to transfer to a different type of ISA, or you may choose to stick with what you’ve got.
If you’re moving funds you’ve invested in an ISA in the 2023/24 tax year, you’ll need to transfer all of it. But if it’s money from previous years, you can transfer all or part of it.
When the new rules kick in on 6 April 2024, some providers may allow a partial transfer of an ISA from one provider to another at any point without affecting its status. Please note, this isn’t something Suffolk Building Society currently offers.
The new rules give you more control over your investments, leaving you free to change providers if you find a better deal elsewhere.
ISA age limit
From 6 April 2024, to open any kind of ISA you’ll need to be at least 18 years old. For Lifetime ISAs you’ll also need to be under 40, just as you do now. Junior Cash ISAs are available for children under 18. These can be opened and managed by parents or guardians.
If you were already aged 16 or 17 on the 5 April 2024, you can apply for or transfer a single adult Cash ISA, in each tax year, to 5 April 2026. If you become 16 after this date, you cannot open an adult Cash ISA until you are 18. These transitional rules apply until 5 April 2026.
Are ISAs worth it?
For anyone looking to save or invest in a tax efficient way, ISAs are certainly worth considering. The range of products on offer gives you the flexibility to save in a way that suits you, factoring in your approach to risk. So why not find out more about our selection of Cash ISAs today.
