6 April 2023

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A guide to ISAs

If you are looking for a new way to save or you’re thinking about investing, ISAs could be a good idea. They are designed to be easy to understand, you can usually withdraw money when you want and the best bit? You will not pay any UK tax*. 

This blog will explain what an ISA is, the different types of ISAs available in the UK, how they work and the pros and cons to help you weigh up your options.

Did you know?

  • Around £72 billion was subscribed to Adult ISAs in 2020-2021
  • 12 million Adult ISAs were subscribed to in the 2020/21 tax year
  • The number of cash ISAs subscribed to decreased by 1.6 million in 2020 compared with 2019
  • The number of people subscribing to stocks and shares ISAs increased by around 860,000 between 2019 and 2020. The share of accounts subscribed to in cash has fallen to 66% of accounts in 2020 compared to 75% in 2019

Source: HMRC Commentary for Annual savings statistics: June 2022

What is an ISA?

Individual Savings Accounts (ISAs) were first introduced in the UK by the government in April 1999, replacing the earlier Personal Equity Plans and Tax-Exempt Special Savings Accounts (TESSAs).

ISAs aim to encourage UK residents to save and invest in a tax-efficient way. This means that you will not pay tax on any income or capital gains and no tax is payable when money is withdrawn from an ISA, so you could be getting more for your money.

What are the benefits?

Opportunities to minimise the amount of tax you pay on your hard-earned cash are few and far between, so having an ISA could be a wise decision. Some ISAs give you instant access to your money and could be used to plan your finances for the short term. On the other hand, if you have longer term savings goals, you can choose to lock your cash away for a fixed term or you could invest in an Investment ISA.

ISAs give you the opportunity to save tax-free*

What types of ISA are available?

There are four main types of ISA available but not all providers will offer each type. If you are a UK resident over the age of 18 (age 16 for a cash ISA only), you can open one of each type in a tax year, providing you don’t exceed the annual allowance:        

Cash ISA

Usually offered by a bank or building society which gives you tax-free interest on a fixed or variable rate and doesn’t count towards your Personal Savings Allowance (PSA - see below). Cash ISAs could be suitable for your short-term savings goals as they don’t invest in the stock market. You might consider a cash ISA as your ‘emergency’ pot of money for any unexpected expenses or a last-minute holiday.

Investment ISA

Also known as a stocks & shares ISA. A tax-efficient investment which allows you to invest your money in things like shares, government bonds (gilts) and property with peace of mind that you won’t pay any capital gains tax or income tax. This type of ISA might be more suitable for your longer-term goals as they have the potential to out-perform cash ISAs over the medium-long term, but with varying levels of risk. The three main factors to consider when choosing between a cash ISA and a stocks and shares ISA is the length of time you’ll be saving/investing, your appetite to risk and the impact of inflation over time.

Sheffield Mutual offers a medium-low risk Investment ISA so if you’re not experienced when it comes to investing but you want your money to work harder, you can let us make the difficult investment decisions. We’ll pool your money together with all our other members to provide you with a potentially better return than what you might find on the high street. The Society is also a part of the Financial Services Compensation Scheme (FSCS) and ‘smoothing’ should protect your investment from short term ups-and-downs.

The current interim bonus rate is 5.25% before a charge of 1.25%. Bonuses are not guaranteed and depend on the performance of the with-profits fund. There is also the possibility of a final (terminal) bonus on closure of the ISA. 

Innovative Finance ISA

A type of investment account which allows you to lend your money through peer-to-peer lending platforms to receive tax-free interest and capital gains. You could be lending money to serve personal loans, small business loans or property loans or a combination of these.

Interest rates can often be much more attractive than cash ISA rates, but peer-to-peer lending is a higher-risk form of investing and your capital is entirely at risk as there is no protection from the Financial Services Compensation Scheme (FSCS).

Lifetime ISA

If you are aged 18 to 39, and are looking to save for your first home or for later life, you could consider a Lifetime ISA. You can hold cash in a Lifetime ISA or choose to invest it just as you would with a stocks and shares ISA. You can put in up to £4,000 each year up to and including the day before your 50th birthday but remember that this £4,000 allowance contributes to your full annual ISA allowance.

The government will pay a 25% bonus on your contributions (£1 for every £4 you put in), up to a maximum of £1,000 a year but you must be aware that a charge of 25% will be applied to any withdrawal if it is for any reason other than buying your first home, at age 60 or if you are terminally ill.

How much can I pay into an ISA?

There is a limit you can pay into ISAs each tax year and this is called your annual allowance. Paying into an ISA is known as subscribing. For the 2023/24 tax year, your annual allowance is £20,000 and you have until midnight on 5 April 2024 to use this allowance. If you don’t use your ISA allowance, you will lose it as it cannot be carried forward.

However, you will have a new annual allowance available from 6 April 2024 in the 2024/25 tax year, so if you have already put £20,000 into an ISA in the 2023/24 tax year, you could put another £20,000 away on or after 6 April 2024.

However, please remember that you can only pay into one of each type of ISA in a tax year, within the annual allowance.

Can I transfer an ISA?

If you are unhappy with your current ISA or provider, your ISA subscriptions can be transferred freely between cash, stocks and shares, and innovative finance ISAs and there is a process in place to ensure that you retain all the tax-free benefits when you apply to transfer.

The beauty of transferring an ISA is that it won’t count towards your current annual allowance**, so, if you have used your full ISA allowance for this tax year, you can still transfer as many ISAs, in full or in part, from previous tax years (started before 5 April) without having to worry about exceeding any annual limits.

You should, however, be aware that if you transfer an ISA opened in the current tax year, you must transfer the full amount that you have put in this tax year.

What about children?

Children under the age of 18 who do not have a Child Trust Fund (CTF) account (available to eligible children born on or between 1 September 2002 and 2 January 2011) can have a Junior ISA (JISA), or a CTF can be transferred into a JISA. 

Junior ISA

Did you know?

  • Around 940,000 Junior ISA accounts were subscribed to in 2020/21, the ninth full financial year since the scheme was launched, down from 1 million in 2019/20.
  • In 2020 to 2021, £1 billion was subscribed to Junior ISAs, around 57% of which was in cash. Average subscriptions in 2020 to 2021 were 3,133, a 19% increase on the 2019 to 2020 figures.

Source: HMRC Commentary for Annual savings statistics: June 2022

A cash or stocks and shares account, or both, can be opened for a child subject to the annual allowance which is £9,000 for the 2023/24 tax year. The account must be opened by the child’s parent or guardian, but anyone can contribute once the account has been opened. Savings in a Junior ISA account cannot be withdrawn until the child reaches 18.

If you’re looking to give a child a solid financial head start in life, with tax-free* returns and a capital guarantee on any money invested over five years, Sheffield Mutual offers a medium-low risk Investment Junior ISA. The current interim bonus rate on our JISA is 5.50% before a charge of 1.25%. Bonuses are not guaranteed and depend on the performance of the with-profits fund.

As we’re a mutual, we don’t have any shareholders to pay so all surplus profits are shared with our members and you can be sure that we’ll look to provide your child with the best possible return. 

A Junior ISA must be opened by the child’s parent or guardian, but anyone can contribute once the account has been opened

Click here to request your Sheffield Mutual Guide to ISAs


Personal Savings Allowance (PSA): Introduced in April 2016, the PSA now means most savers in the UK no longer have to pay tax on their savings income. Basic-rate taxpayers qualify for a £1,000 PSA, so can receive up to £1,000 a year in savings income tax-free. Higher-rate taxpayers qualify for a £500 year allowance. ISAs are tax free so any interest from an ISA doesn’t count towards your PSA.

Financial Services Compensation Scheme (FSCS): The UK’s statutory insurance and investors compensation scheme for customers of authorised financial services firms. The FSCS can pay compensation if a firm is unable, or likely to be unable, to pay claims made against it. The FSCS doesn’t cover investment performance.

Smoothing: A process of holding back some surplus profit in good years to top up returns in years where investment performance is not as positive.

*This blog is based on our current understanding of tax legislation, which could change in the future.

**Subscriptions in previous tax years won’t count towards your annual ISA allowance but if you are transferring your Help to Buy ISA into a Lifetime ISA it will count towards your annual £4,000 limit.

The value of your investments can go down as well as up, and you may get back less than you originally invested.

Rates shown were correct at the date the blog was posted. 

This blog provides generic information and opinions of the writer and should not be relied upon for making investment decisions. No financial advice has been provided by Sheffield Mutual. If you are in any doubt as to whether a savings or investment plan is suitable for you, you should consider contacting a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk or www.vouchedfor.co.uk. Advisers may charge for providing such advice and should confirm any costs beforehand.

By Dawn Webb


Chief Commercial Officer

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