We’re in a new tax year as of last week and, among the many financial changes taking place, there’s a big shake up of ISAs.
As of 6 April 2024, you’re allowed to have more than one type of ISA in the same tax year.
It means you no longer have to choose between a cash ISA or a stocks and shares ISA – you can have both.
This is especially helpful if you want to diversify your portfolio.
Your ISA allowance is staying the same for the time being, and the changes only apply to some types of ISAs.
Here’s what you need to know.
What are the different types of ISAs?
There are a few different types of ISAs you can choose from.
Under the main category, there are three types of ISAs:
- Cash ISA – this works in the same way as a normal savings account where you’re paid interest according to the amount of money you hold, except everything is in an ISA wrapper so you don’t pay tax on any interest received.
- Stocks and shares ISA – the money in these accounts are intended for investing; as it’s in an ISA wrapper, you don’t have to pay any capital gains tax or dividend tax.
- Innovative finance ISA – a lesser known category, this is a portfolio that includes peer-to-peer lending; again, you won’t pay tax on any earnings.
Everyone has an annual ISA allowance of £20,000, which can be used for any of these ISAs.
The allowance refreshes at the beginning of each tax year (6 April), so you can essentially save up to £20,000 each year tax free.
Other types of ISAs
In addition to the main ISAs, there’s also the Lifetime ISA (LISA).
There are a few things that make the LISA different from a regular ISA.
For one, you’ll have to pay a penalty to withdraw the money unless you’re using it to buy your first home, which must be worth less than £450,000, or you’re over 60.
Similar to a pension, you also get a government top up of 25% on whatever you put in.
However, you can only pay £4,000 a year into your LISA. And if you contribute the full amount, you can only pay up to £16,000 into your main ISA in that tax year.
For those under 18, there’s the Junior ISA, with an annual allowance of £9,000.
The government also announced that it would be launching a British ISA in the March 2024 Budget.
This new category will have a £5,000 separate allowance that’s specifically for those who want to invest in the UK.
The launch date for this is still to be confirmed.
New ISA rules from 2024/2025 tax year
The new ISA rules that came into effect on 6 April 2024 only apply to the main ISAs, and not LISA or the Junior ISA.
You still get the £20,000 annual allowance as before. However, for the first time you can split this sum across multiple ISAs instead of having to choose just one.
For example, you can hold a cash and stocks and shares ISA in the same year.
Your contributions across all of the ISAs cannot exceed £20,000, or £16,000 if you’re also paying the full sum into a LISA.
For LISAs, you still have to choose between cash or stocks and shares.
Why the new ISA rules are a good thing
Under the old rules, you could only contribute to one ISA each year, which meant you had to choose between cash, innovative finance or stocks and shares.
If you’re nervous about investing, you might not feel all that confident about putting all of your money into a stocks and shares ISA.
And while interest rates for cash ISAs have gone up, they’re often not as competitive as traditional savings accounts.
The new rules mean you can split your money across multiple products and diversify your portfolio in a way that suits you.
I personally think it could also encourage more competition between ISA providers since you don’t have to put all your money into one place.
Plus, it gives you more opportunities to take advantage of any incentives that ISA providers are offering, such as a sign up bonus.
Things to be aware of
As well as your £20,000 annual allowance, you should remember that the Financial Services Compensation Scheme (FSCS) has an £85,000 limit on the protection they offer for money saved with each provider.
If you think your ISAs – plus any other money held with the provider – might go over this limit, it might be worth spreading your ISA across multiple providers to spread the risk.
Remember that if you want to move your money from one ISA to another, don’t withdraw it. Instead, request a transfer.
If you withdraw the money and then save it again, you’ll eat into your ISA allowance.
Also bear in mind that not all providers allow transfers in so it’s worth checking the terms and conditions before you open an ISA.
