We explain everything you need to know about tax-efficient ISAs: what they are, how they work, and what your allowance is.

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What is an ISA?‍

ISA stands for Individual Savings Account, it’s a tax-efficient account, also known as a ‘tax wrapper’ for a savings or investments account. They are popular  This means you don’t pay tax on any returns you earn on money held in an ISA.

There are four kinds of ISAs (more on this later) available and at Chip we offer access to a Stocks & Shares ISA - a type of investment account that allows you to hold a range of different shares, funds, investment trusts and bonds and pay no UK income or capital gains on returns (or profit) from your investments.

As will all ISA products, you can only contribute to one Stocks and Shares ISA per tax year.

You can read more about ISAs on the official UK Government website here.

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Who can open an ISA? 

To open an ISA you need to meet the following criteria 

• You’re over 18
• You’re a UK tax resident
• You aren’t a US citizen

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How do ISAs work?

ISAs function in much the same way as a regular bank or savings accounts with the key difference being you can only put a limited amount of money into an ISA every tax year, this is known as your annual ISA allowance.

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What’s my ISA allowance?

All UK residents over 18 (or 16 for cash ISAs) currently have an annual ISA allowance of £20,000 per tax year. The tax year runs from 6 April to 5 April the following year. Any unused allowance doesn't roll over into the following tax year. 

For example, if you don’t use your full £20,000 this year (2023/24), and only put in £15,000, you can’t carry the remaining £5,000 over to the next tax year and invest £25,000 into an ISA in 2023/24.

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What are the benefits of an ISA?‍

Tax-Free Returns

The main benefit of an ISA is that any returns you earn are tax-free. This means you don't need to pay any income tax, capital gains tax, or dividend tax on returns or interest you earn

Flexibility 

Some ISAs (including Cash ISAs and Stocks & Shares ISAs) can be flexible, meaning you can withdraw and replace cash in the same tax year without it affecting your annual allowance. Not all providers offer this service however, so it’s best to check. Chip’s Stocks & Shares ISA is flexible. 

Low cost to get started

You’ll often see the figure of £20,000 in relation to ISAs but this is just the maximum amount you can pay in. You don’t need to have this much available to get started and you can start seeing the benefits of an ISA from as little as £1. 

You can transfer your ISA

You can transfer your ISAs from one provider to another at any time and even transfer between different types of ISAs. If you want to transfer money you’ve invested in an ISA during the current tax year, you must transfer all of it. For money you invested in previous tax years, you can choose to transfer all or part of your savings for extra flexibility .

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What types of ISA are there?

There are 4 types of ISA available in the UK. These are Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs and Lifetime ISAs.

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How many ISAs can I have?

You can hold as many of them as you like but you can only pay into one type of each ISA in the same tax year which runs from 6 April to 5 April the following year. Your £20,000 ISA allowance covers all of them (not £20,000 per ISA).

You cannot pay two of the same types of ISA in any one tax year. e.g. You could put £10,000 in a Stocks and Shares and £10,000 in a Cash ISA in the same tax year but you could not put £10,000 in one Stocks and Shares ISA and £10,000 in another Stocks and Shares ISA.

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Which ISA might be right for you?

The type of ISA you want depends on your circumstances. A cash ISA may suit you best if you’re looking for easy access to your money and you think you might go over your personal savings allowance in a tax year.

However, it is worth considering that easy-access savings accounts without an ISA wrapper typically offer better interest rates.

If you’re taking a longer term view and are prepared to take on some risk, you can seek potentially higher returns with a Stocks and Shares ISA or an Innovative Finance ISA.

If you’re looking towards buying your first home or retirement then a Lifetime ISA could be the right fit. 

Chip does not give financial advice and you should not construe this as a personal recommendation. Always consider your own personal tax and financial circumstances.