Since they were introduced in 1999, ISAs have become a finance staple for many households thanks to providing a tax-efficient way to save and invest. As ISAs turn 25, chancellor Jeremy Hunt unveiled plans to launch a new UK ISA and has previously announced changes that could provide you with more flexibility.

Read on to find out what you need to know about ISAs.

The UK ISA could increase your allowance by £5,000

The government will carry out a consultation about the introduction of the UK ISA until June 2024. So, there are currently only a few details available.

In the March 2024 Budget, the chancellor said the UK ISA would have a new £5,000 annual allowance, in addition to the existing ISA allowance, which is £20,000 in 2024/25. It will be a type of Stocks and Shares ISA that’s designed to encourage investment in UK companies.

Which assets could be held in a UK ISA or what will constitute a “UK-focused” investment hasn’t been clarified.

The UK ISA could provide a tax-efficient way to invest for those who use the current £20,000 ISA allowance each year. However, investors are likely to need to consider the effect it could have in terms of diversification. Investing heavily in the UK could lead to a portfolio that no longer suits your risk profile and isn’t as balanced.

Changes to ISA rules could help you save or invest in a way that suits your goals

Despite calls to increase the ISA allowance, it will remain at £20,000 for the 2024/25 tax year. Yet, revisions to ISA rules from 6 April 2024 could change how you use them to save and invest.

Two key adjustments mean you can:

  • Open and pay into multiple ISAs of the same type during the same tax year

Under previous rules, you could only open and pay into one ISA of each type during the tax year. From 6 April 2024, this is no longer the case.

So, you could open a Cash ISA at the start of the tax year and make a deposit. If you then find a different provider offering a Cash ISA with a better interest rate later in the year, you can open another account right away, rather than having to wait for a new tax year to start.

The change means you’re in a better position to take advantage of new deals as they become available. Bear in mind that your total ISA subscription limit will apply across all ISAs you contribute to in a tax year.

  • Make partial transfers between ISA providers

Previously, if you wanted to transfer money from one ISA to another in the same tax year, you had to transfer all of the funds. Now, you can make partial transfers, which could provide you with more flexibility.

Let’s say you have £20,000 invested through a Stocks and Shares ISA. You might want to transfer a portion of the money to a different Stocks and Shares ISA because it would give you access to a fund that suits a specific goal, but would also like to keep some money in the original ISA for a different purpose.

From 6 April 2024, partial transfers between ISAs are possible.

5 fantastic reasons to consider using your ISA allowance in 2024/25

With the ISA allowance resetting for the 2024/25 tax year, here are five fantastic reasons you might want to make saving or investing through them part of your financial plan.

1. Interest received on savings held in a Cash ISA isn’t liable for Income Tax

The interest you receive on cash savings held outside of a tax-efficient wrapper could be liable for Income Tax if you exceed the Personal Savings Allowance, which, in 2024/25, is:

  • £1,000 for basic-rate taxpayers
  • £500 for higher-rate taxpayers
  • £0 for additional-rate taxpayers.

So, using an ISA for savings could reduce your overall tax bill.

2. You could reduce your Capital Gains Tax bill by investing through a Stocks and Shares ISA

An ISA could also prove tax-efficient when you’re investing as the returns your investments earn wouldn’t be liable for Capital Gains Tax (CGT). The rate of CGT depends on your other taxable income, but it can be as high as 20% (24% on residential property) in 2024/25. So, if you don’t invest through an ISA, you might face a substantial tax bill.

3. A Lifetime ISA could provide you with a government bonus

If you’re aged between 18 and 39, you could open a Lifetime ISA (LISA), which is designed to help people save a deposit for their first home.

You can add up to £4,000 to a LISA in 2024/25, and you’d receive a 25% government bonus, which might help you reach your goals sooner. You can save or invest with a LISA.

However, if you want to make a withdrawal for a purpose other than buying your first home before the age of 60, you must pay a 25% charge. This penalty means you’d lose the bonus and a portion of your own money. As a result, it is important to set out your goals and time frame when deciding if a LISA is right for you.

4. You could use a Junior ISA to save or invest for a child

A Junior ISA (JISA) could offer you a tax-efficient way to save or invest on behalf of a child. A parent or guardian can open a JISA for a child, and in the 2024/25 tax year, you can contribute up to £9,000.

Like their adult counterparts, the money held in a JISA isn’t liable for Income Tax or Capital Gains Tax.

One thing to keep in mind is that the JISA will convert into an adult ISA when the child turns 18, and they’ll be able to use the money how they wish.

5. If you don’t use your £20,000 ISA allowance, you’ll lose it

You cannot carry forward any unused ISA allowance into a new tax year. So, if you don’t use it before 6 April 2025, you’ll lose your allowance for the 2024/25 tax year. As a result, it might be worth considering your long-term financial goals and whether an ISA could play a role now.

Contact us to talk about your saving and investing goals

Please contact us if you’d like to discuss how ISAs could form part of your wider financial plan by saving or investing in a tax-efficient way.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.