Everything you need to know about ISAs for tax year 2021/22
What is an ISA?
Simply, it’s a savings or investment account you never pay tax on during your lifetime. Each tax year, you get an ISA allowance which sets the maximum you can save within the tax-free wrapper from 6th April to 5th April. ISAs for tax year 2021/22 have a maximum saving limit of £20,000.
ISAs for tax year 2021/22: How many ISAs can you have?
You can hold an unlimited number of ISAs with different providers, but you can only subscribe to up to one of each type per tax year. As long as your total tax-free savings in 2021/22 are no more than £20,000, you can split your savings across a combination of cash ISA, stocks and shares ISA, lifetime ISA (if eligible) or innovative finance ISA savings. This means that whilst you cannot subscribe to two cash ISAs in the same tax year, for example, you can subscribe to more than one ISA per year – they just have to be different types of ISAs.
What are the different types of ISAs?
It is important to understand the different types of ISAs and how they could benefit you in order to decide how to invest.
- Cash ISA
Essentially this is just like an ordinary savings account although you are never taxed on the interest. These are usually contained in a bank or building society savings account.
There are a variety of cash ISAs available, including instant access, regular savers and fixed-rate deals and you do not have to pay to open a cash ISA.
A fixed rate cash ISA can pay a guaranteed amount of interest over a fixed period of time, which is attractive to investors who wish to ‘know what they are getting’.
It is perhaps for this reason that around 80% of all ISAs are saved into cash (according to ONS statistics), but they do tend to be the ISAs which pay the lowest interest rate so they might not be the best option for long-term investment.
Many fixed rate Cash ISAs are easy access accounts so they are attractive to those who think they might need funds at short notice.
It’s often asked whether they are any better value than a bank account. Since the Personal Savings Allowance (PSA) was introduced in 2016, basic rate (20%) taxpayers can earn up to £1,000 of interest a year tax-free while higher rate (40%) taxpayers can earn up to £500 interest a year tax-free on savings accounts. Interest from ISAs doesn’t count towards your PSA, so a rise in interest rates could give you a lot more interest from an ISA than from an ordinary savings account.
- Help To Buy ISA
Essentially, these are cash ISAs aimed at helping first time buyers get a foothold onto the property ladder.
The Help to Buy ISA enabled you to invest up to £1,200 in month one, then a further £200 a month. When the funds are used to purchase your first home, the Government will boost your savings by 25% up to a maximum of £3,000.
Since 30 November 2019 these have been closed to new applicants. Deposits can continue to be made to existing Help to Buy ISAs though until 2029. If you didn’t get one in time, Lifetime ISAs also offer a 25% bonus for first-time buyers.
But if you got a Help to Buy ISA before the deadline, here are a few things that it is worth knowing. If you are buying with another first-time buyer, you can join bonuses. The bonus will only be available on homes you buy for £250,000 or less, or £450,000 in London. Your solicitor will apply for the bonus when you purchase the home.
- Lifetime ISA
Lifetime ISAs (also known as LISAs) are a type of ISA created to help people aged between 18 to 40 years save for their first home or retirement.
Lifetime ISAs were launched on 6 April 2017. At £4,000 a year the LISA has a higher annual maximum contribution than the Help to Buy ISA and gives interest from day one, with a bonus of 25% which is paid monthly (or 4-6 weeks after a subscription is made if made other than monthly).
You must be under 40 to open one, and the bonus is paid until the age of 50. Therefore, effectively for every £4 you save up to the time you reach 50, the government will give you £1.
Once you reach 60 you can take out as much as you like tax-free. If you take money out before age 60, you will lose the government bonus and the interest on that bonus.
However, if you withdraw from the LISA specifically for a deposit for buying a first home you will not be penalised and you can retain the account and keep saving in it for your retirement.
- Stocks and shares ISA
These are also known as investment ISAs, and usually involve putting your ISA into the hands of a fund manager or an online service to invest into a variety of different bonds and shares, or tracking the FTSE 100 index.
There is no capital gains tax (CGT) payable on profits coming from share price increases and you don’t have to pay tax on interest earned from bonds or dividends from shares.
If you invest outside an ISA, any profits made above the annual CGT allowance (£12,300 pa until April 2026) would be subject to tax at 10% if, when added to income, the gain falls in the basic rate band and 20% on any of the gain that falls above the basic rate band.
Most Investment ISA providers charge fees and management charges and may charge other fees too depending on what you want to do with your investment.
This kind of ISA is more of a long-term investment, as shares can go down as well as up and as a short-term investment this could be riskier than a Cash ISA.
- Innovative Finance ISA
An innovative finance ISA (IFISA) lets you use your tax free ISA allowance while investing in peer to peer (P2P) lending.
An IFISA works by you becoming a lender, investing in individuals, property or businesses in return for a set amount of interest based on the length of time you are prepared to leave your money untouched.
With an IFISA interest from lending to others is not taxed, though it is a riskier proposition than a Cash ISA as there can be less of a guarantee you will get your money back.
Not all P2P lenders are authorised by the Financial Conduct Authority (FCA), or given ISA Manager status by HMRC, which can be an issue.
If the IFISA is regulated, investments can be held tax-free. If not, interest would still count as part of the PSA.
You can have multiple ISAs and it is important to understand how each type could benefit you when deciding how to invest.
Cowgills is a leading independent firm of Chartered Accountants and Business Advisors based in the North West of England – from Greater Manchester to Liverpool. We use our sector experience to deliver tailored financial solutions and support for businesses.
Get in touch with our Head Office in Bolton, Greater Manchester, for any further advice on ISAs for tax year 2021/22 on 01204 414 243.
Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. The tax benefits relation to ISA investments may not be maintained.
The value of investments and income may go down. You may not get back the original amount invested. Past performance is not a reliable indicator of future performance.
The information was correct at time of publishing but may now be out of date.