Cash Isa rules and allowances

Isas

Cash Isa rules and allowances

By Chiara Cavaglieri

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Cash Isa rules and allowances

How to invest your Isa allowance in line with the latest rules plus your most common Isa questions answered by Which? Money experts. 

The hugely popular, tax-free individual savings account (Isa) has faced sweeping changes since it was first introduced, with new rules establishing greater flexibility and easy transfers between accounts. 

In 2014, the government first boosted the allowance and relaxed rules surrounding Isa deposits and transfers. Further Isa changes were confirmed the following year covering withdrawals, dividend tax credit for stocks and shares, Help to Buy Isas, and peer-to-peer lending. 

Here, we explain what all these changes mean - to help you get the best from your Isa. 

If you want to skip this and go straight to some of the best rates on the market, head to Which? Money Compare.

Your annual cash Isa allowance

Each tax year, the government sets an annual limit for the amount of money that savers can store in Isas. 

The annual allowance increased from £11,880 to £15,000 on 1 July 2014. It was bumped up again on 6 April 2015 to £15,240, where it remains for the 2016/17 tax year.  

It will rise once more to £20,000 on 6 April 2017. 

If you don't use your annual Isa allowance before the end of each tax year, which is always on 5 April, you lose it. 

Under the old rules, you could only place half of your annual allowance into a cash Isa - the remainder had to go into stocks and shares. 

Under the new rules, savers can deposit the full £15,240 into cash or the full amount into stocks and shares - or any mix of both cash, and stocks and shares.

Alternatively, you can invest some, or all of your annual Isa allowance in a new type of Isa called the innovative finance Isa which covers peer-to-peer (P2P) lending via platforms such as Zopa and RateSetter. The government is also consulting on whether to extend this to crowdfunding.

All UK residents aged 16 or over can have a cash Isa, although you must be 18 before you can open a stocks and shares Isa. Crown employees serving overseas or individuals married to such employees are also eligible to open Isas.

Flexible Isa withdrawals 

Previously, if you removed cash from an Isa it automatically lost its tax-free, status but still counted towards your annual allowance. 

So, for example, if you saved £10,000 into an Isa and then removed it, you were only allowed to deposit a further £5,240 into your Isa. 

The government introduced a new optional flexibility for Isas on 6 April 2016 so that you can take money out and put it back later in the year, without losing any of your tax-free entitlement. 

The only condition is that you top up your Isa in the same tax year the withdrawal was made. If you put it back in the next year, it will count towards your new annual allowance. This will also apply to cash held in stocks and shares Isas, but not Junior Isas. 

This flexibility is not compulsory and won't be available on all Isas - as we explain in this news story - so you should always check with your provider before withdrawing any money.

It's worth noting that fixed-rate cash Isas require you to keep your money in the account for a certain period of time, or you could face a penalty.   

Which? Comparison Table: Instant-access cash Isas - compare the best deals on the market

Help to Buy Isas and lifetime Isas

Help to Buy Isas were available to first-time buyers from 1 December 2015 at participating banks and building societies. 

If you're saving up for a deposit you receive a £50 bonus for every £200 saved in the Isa, There is a maximum government bonus of £3,000 on £12,000 of savings. You can open your Help to Buy Isa with a one-off deposit of £1,000 to kick things off and add £200 per month thereafter.

The lifetime Isa will be available from 6 April 2017. This new tax-free account will be open to adults aged 18-39 only, designed to help them buy their first home or save for retirement, with the government adding a £1 bonus for every £4 you save, up to the age of 50.

Junior Isas

Children under the age of 18 can save cash tax-free in a Junior Isa. The annual allowance for Junior Isas is currently £4,080.

Junior Isas will not be eligible for the new rules on flexible withdrawals mentioned above. 

Find out more: Junior Isas- we've compared the top deals on offer.

Your Isa questions answered

We get hundreds of letters, emails and calls to our Money Helpline from people asking about Isas. Here, we answer your most common questions:

Q. What is the difference between a cash Isa and a stocks and shares Isa?

A cash Isa is simply a tax-free savings account. You get paid interest by your cash Isa provider without any tax deducted.  

A stocks and shares Isa allows you to invest in shares, bonds and investment funds. Unlike a cash Isa, your money is at risk of stock market losses, but it also has the potential for a higher return.

You don't have to pay any income tax or capital gains tax (CGT) on investments sheltered within a stocks and shares Isa. 

Investors also receive a new £5,000 tax-free dividend allowance. Beyond this, dividend tax rates are set at 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional-rate taxpayers. 

Q. Can I transfer my stocks and shares Isa savings to a cash Isa?

Yes, you're now able to transfer from a stocks and shares Isa to a cash Isa, and vice versa. Under previous rules you could only transfer from cash to stocks and shares. 

You can transfer as much as you like – including previous years' stocks and shares Isa investments. This all depends, however, on whether your new cash Isa provider will accept transfers in. Not all do, so you'll need to check.

Q. Can I have my stocks and shares, and cash Isa savings with one provider?

Some stocks and shares Isa providers also offer a cash Isa, however most people will still use a specialist for each – securing the best cash Isa rates from a bank or building society, while investing in a stocks and shares Isa through a fund supermarket, such as Alliance Trust Savings, Hargreaves Lansdown or Interactive Investor. 

Holding cash in a stocks and shares Isa is usually only temporary until you decide where to invest it. If you have a large cash balance which you don't intend to reinvest later, it's still advisable to transfer this to a cash Isa with a bank or building society to get the best deal.

See Which? fund supermarket reviews to find out more about investment brokers.

Q. How long should it take to transfer an Isa?

This depends on the type of Isa that you have:

Cash to cash Isa

This should take no longer than 15 working days. When you open up your new cash Isa, you’ll need to tell the provider that you want to transfer from another cash Isa, and they’ll arrange the transfer. Never manually withdraw your savings from your old cash Isa and transfer it to your new provider, as your savings will lose its tax-free status. You can find out more in our guide to transferring your cash Isa

Cash to stocks and shares Isa

Transferring from a cash Isa to a stocks and shares Isa can take longer – guidance from HMRC states that it could take up to 30 days. You'll need to fill out an Isa transfer form with your intended stocks and shares Isa provider, who will arrange the transfer.

Stocks and shares to cash Isa

Transferring from a stocks and shares to a cash Isa will depend on what kind of investments you own. If you have funds, such as unit trusts, it takes around five days to cash in your investments; shares take around three days. Your cash Isa provider should give you a form in which you list the investments you want to sell and arrange the transfer.

Stocks and shares to stocks and shares Isa

Transferring from one stocks and shares Isa provider to another can take as long as three months, depending on how you do it.

You can find out more in our guide to transferring your stocks and shares Isa

Q. What if I exceed the annual Isa allowance?

Because it's possible to have a cash Isa with one provider and a stocks and shares Isa with another, there is a risk that you might pay in too much during a single tax year. 

At the end of the tax year, records for individuals will be checked, so HMRC will know that you've paid in too much money. You may be let off with a warning letter if it's the first time this has happened but it's best to check yourself.

Where HMRC decides to take action, your Isa provider may be instructed to remove over-subscriptions and tax any income or growth related to that money. 

HMRC advises against trying to correct the mistake by drawing money out - you can call its Isa helpline instead on 0300 200 3312. 

Q. Can my partner inherit my Isa savings? 

Yes - although technically they inherit your Isa allowance, not the money itself. The rules are a bit complicated, but we walk you through it in this guide to inheritance Isas.

  • Last updated: September 2016
  • Updated by: Chiara Cavaglieri