The ISA allowance: how it works and how to use it

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The ISA allowance1 is the maximum amount of new money you can put into the range of tax-free savings and investment accounts that make up the ISA family.

The ISA allowance for the current tax year to 5 April is £20,000.

The tax year runs from 6 April to 5 April the following year.

ISAs are a superb vehicle for growing your wealth tax-free. But the rules are complicated – seemingly made up by a bureaucrat with a grudge against mankind.

So this article is here to help you make the most of your ISA allowance.

We’ll iron out the wrinkles leftover from the government’s official ISA pages.

What is an ISA?

ISA stands for Individual Savings Account. It’s the UK’s most important tax-free account for those savings and investments you want to access before retirement age.

ISAs are called tax-free wrappers because they legally protect the assets inside the account from:

• Income tax on interest paid by cash, bonds, and bond funds.

• Dividend income tax on dividends paid by shares and equity funds.

• Capital gains tax paid on the growth in value of assets such as shares, bonds, and funds.

You don’t even have to declare your ISA assets on your self-assessment tax return. This can save you a ton of tax paperwork.

Your assets remain tax-free as long they’re held in an ISA account… and so long as you don’t have the cheek to die.

You don’t even lose out if you move abroad. (At least, not from the perspective of the UK government.)

Unlike a pension, your ISA funds are typically2 accessible at any time.

You’re also not charged income tax on withdrawals from an ISA – again unlike a pension. So there’s no danger of being pushed into a higher tax bracket by the wealth you accumulate in your ISA.

• Read up on ISAs Vs SIPPs to learn how best to allocate between them.

ISA accounts: what types are there?

ISA type	Allowance3	Eligible investments	Notes
Stocks and shares ISA	£20,000	OEICs, Unit Trusts, Investment Trusts, ETFs, individual shares and bonds	Age 18+. Can be flexible, but only cash can be added and withdrawn
Cash ISA	£20,000	Savings in instant access, fixed rate, and regular varieties	16+. Can be flexible
Innovative Finance ISA (IFISA)	£20,000	Peer-to-peer loans (P2P), crowdfunding investments, property loans	Age 18+. Can be flexible. Not covered by FSCS compensation scheme
Lifetime ISA (LISA)	£4,000	As per cash ISA or stocks and shares ISA	Open account from age 18 until 40. Pay in until age 50. Only use for buying first home, or from age 60, otherwise penalty charge
Junior ISA (JISA)	£9,0004	As per cash ISA or stocks and shares ISA	Open until age 18. Child may withdraw funds from 18+

New Help to Buy ISAs are no longer available. If you have one already you can continue to save into it until 30 November 2029.

What about the NISA? NISA stands for New Individual Savings Account. This term described the new-style ISAs brought in by rule changes in 2014. Today every ISA follows the NISA rules, so the jargon is obsolete.

How much can I put in an ISA in 2024 – 2025?

You can save up to £20,000 of new money into your ISAs during the tax year 6 April 2024 to 5 April 2025. 

You can put all £20,000 of your ISA allowance into one ISA5 or split it across any combination of the following ISA types:

• Cash ISA
• Stocks and shares ISA
• Lifetime ISA (£4,000 annual limit)
• Innovative Finance ISA

The rule is that you can only pay new money into one of each ISA type per tax year.

For example you could put £20,000 into a stocks and shares ISA and nothing into any other type.

Or you might split your £20,000 like this:

• Stocks and shares ISA = £14,000
• Lifetime ISA = £4,000
• Innovative Finance ISA = £1,000
• Cash ISA = £1,000

Or any other combination you like. Just so long as you don’t pay in more than £20,000 within the tax year, and you don’t put new money into more than one of each ISA type.

What about money in previous years’ ISAs? That money does not count towards your annual ISA allowance for the current tax year.

For clarity’s sake, we’ll refer to assets in your previous years’ ISAs as old money. Assets in the current tax year’s ISAs we’ll term new money.

Interest, dividends, and capital gains earned on assets already held within an ISA do not count towards your ISA allowance.

Your £20,000 ISA annual allowance is a ‘use it or lose it’ deal. You can’t rollover any of it into the following tax year.

The ISA deadline for using up your allowance this tax year is 5 April 2024.

More ISA wrinkles

• Each ISA can be held with the same or a different provider.

• Payment into a JISA uses up the child’s allowance, not yours.

• Some providers have all-in-one cash ISAs. With these you can split new money between instant access and fixed-rate options, within a single ISA wrapper. That means you only count as contributing to a single cash ISA.

• The Help to Buy ISA counts as a cash ISA. If you pay new money into your Help to Buy ISA then you can’t also pay new money into a Cash ISA. A few providers include their Help to Buy ISA within their all-in-one cash ISA.

• A workplace ISA counts as a stocks and shares ISA. If you’re one of the three Britons6 who has one, then you can’t pay new money into a standard stocks and shares ISA, too. See below for our cunning workaround.

• You can only claim the government bonus when buying your first home from a Help to Buy ISA or a Lifetime ISA. Not both.

ISA reforms: upcoming changes for 2024

The government announced a package of ISA reforms in November 2023 and will make these changes to ISAs from 6 April 2024:

1. Increase the age for opening Cash ISAs from 16 to 18 and over. This is consistent with the age requirement already in place for opening Stocks and Shares, Innovative Finance and Lifetime ISAs. 
2. Allow subscriptions to multiple ISAs of the same type, with the exception of Lifetime ISA, within the tax year, removing the limit on subscribing to one ISA of each type per year. All subscriptions must remain within the overall ISA limit of £20,000.
3. Remove the requirement for an investor to make a fresh ISA application where an existing ISA account has received no subscription in the previous tax year. 
4. Allow Long-Term Asset Funds to be permitted investments in an Innovative Finance ISA, which does not require access to funds within 30 days. 
5. Allow open-ended property funds with extended notice periods to be permitted investments in an Innovative Finance ISA.
6. Allow partial transfers of current year ISA subscriptions between ISA managers.

We’ll update our article after 6 April to reflect these changes. Watch this space!

Withdrawing from an ISA: the flexible option

If you withdraw money from your ISA, can you replace it and not reduce your ISA limit?

Yes, but only if your ISA is designated as ‘flexible’.

If your ISA is not flexible (ask your provider) then a withdrawal reduces your tax-free ISA savings as follows:

• You put £10,000 into your ISA. That reduces your ISA allowance to £10,000.
• Next you withdraw £5,000.
• You can only contribute another £10,000 into your ISAs this tax year.
• Do so, and you’ll have added £15,000 to your ISAs in total by the end of the tax year.

Obviously £15,000 is less than £20,000, and so you’ll not have maximised your annual allowance.

Flexible ISAs get around this problem. More on them below. Again, ask your provider if your ISA is flexible or check its key features documentation.

How many ISAs can I have?

You can have as many ISAs as you like. Or as many as providers are willing to open for you.

However you just can’t contribute new money to multiple ISAs of the same type in the same tax year.

That rule remains the same whether we’re talking about a freshly opened ISA or one that you hold from previous years.

You can put new money into a previous year’s ISA if your ISA provider allows.

If you put new money into a previous year’s ISA of one type then you can’t put new money into another ISA of the same type in the same tax year. You’d have to wait until the next tax year.

For instance, you put money into your existing shares ISA from earlier years. You cannot now put new money into a different shares ISA for the rest of this tax year.

The government calls this the one-type-of-ISA-a-tax-year rule. (Snappy!)

However you can open new ISA accounts by transferring old money into them from previous years’ ISAs.

You could open, say, ten stocks and shares ISAs with multiple providers by transferring old ISA money into them. Let sanity be your guide.

That leads to a workaround for moving new money into more than one ISA of the same type. More on this below.

ISA transfers

An ISA transfer enables you to officially switch an ISA’s holdings to another provider. This way you avoid losing the tax exemption on your assets when moving them.

The transfer rules for any ISA opened in the current tax year are straightforward:

• You must transfer the whole balance of your ISA…

• …and you can transfer it at any time to another provider.

• You can also transfer it to any other type of ISA, or even the same type. (Let’s live a little!)

• If you transfer from one type of ISA to another, then you count as subscribing to the receiving ISA type. For example, you transfer from a cash ISA to a stocks and shares ISA. You can still open a new cash ISA without contravening the ‘one type of ISA per tax year’ rule.

• If you transfer from a Lifetime ISA to a different ISA type before age 60, you’ll have to pay a nasty penalty charge.

• Beware any transfer fees imposed by your current ISA provider.

• Transfers into a Lifetime ISA must not exceed the £4,000 current tax year limit.

The golden rule with any ISA move is always to transfer your money. Don’t just go “sod it!” and withdraw your cash in a flounce. If you transfer your ISA to another provider, your assets retain their tax-free status. If you just withdraw the money they don’t.

• Find out how to transfer a stocks and shares ISA.

ISA transfer rules for previous years’ ISAs

You have more options with ISAs opened in previous tax years. You can transfer any amount from any of your old ISAs to the same or any other type of ISA.

• Any number of your old ISAs can be consolidated into a new ISA of the same or different type.

• Any of your old ISAs can be split by transferring a portion of the balance into multiple ISAs of the same or different types.

• You can transfer to the same or different providers.

Transferring previous years’ ISAs leaves your current tax year’s allowance untouched.

For example, moving £40,000 from an old ISA into a new ISA still leaves you with a £20,000 ISA allowance for the current tax year.

You could transfer £4,000 into this year’s LISA from an old ISA (of any type), gain the government bonus, and leave your £20,000 allowance entirely intact.

This move maxes out your LISA allowance for the tax year. But you must not then exceed that £4,000 LISA limit by transferring more cash into the LISA during the current tax year.

As before, make sure you transfer an ISA. Employ the new provider’s ISA transfer process to maintain your ISA money’s tax-free status. Don’t withdraw cash or re-register assets using any other method.

As you can see, your old ISA optionality amounts to a near Bacchanalian free-for-all.

Which brings us to our heavily trailed workaround for the one-type-of-ISA-a-tax-year rule.

Hang on to your hats!

Getting around the one-type-of-ISA-a-tax-year rule

Let’s say you wanted to split £20,000 between two new stocks and shares ISAs.

You could do it like this:

• £10,000 into a new stock and shares ISA.
• Transfer £10,000 from previous years’ ISAs into another new stocks and shares ISA.
• Replace the transferred old ISA money by funding a new cash ISA with the remaining £10,000 of your current tax year ISA allowance.

Obviously this manoeuvre requires you having, say, an emergency fund of cash tucked away in your old ISAs. But that’s a good idea anyway.

If you don’t want to open a new cash ISA then you can choose any of the other types except a new stocks and shares ISA. (That’s because of the one-type-of-ISA-a-tax-year rule.)

Flexible ISAs

Flexible ISAs let you withdraw cash and put it back in again later the same tax year. Their special sauce is they allow you to do this without grinding down your current tax year’s ISA allowance or reducing how much you’ve saved tax-free.

The following ISA types may be flexible:

• Stocks and shares ISA
• Cash ISA
• Innovative Finance ISA

Flexibility is not an inalienable right. The ISA provider has to decide to offer it and be prepared to deal with the administrative faff. Providers may offer flexible and inflexible versions of the same ISA type.

This example shows how the flexible ISA rules work:

• ISA allowance = £20,000
• Contributed so far = £10,000
• Remaining contribution = £10,000
• You choose to withdraw = £5,000

In this case can still pay £15,000 into your flexible ISA before the ISA deadline at the end of the tax year because:

Remaining ISA allowance = £15,000 (£10,000 remaining contribution + £5,000 replacement of the withdrawal.)

If your ISA was inflexible then your remaining ISA allowance would be just £10,000. In other words, you couldn’t replace the withdrawn amount. And it would have lost its tax-free status.

Flexible ISAs: contributing factors

Contributions made to an ISA in the same tax year as withdrawals work in this order:

1. Replace the withdrawal.
2. Reduce your remaining ISA annual allowance.

Withdrawals from an old flexible ISA can be replaced in the same tax year. This won’t reduce your current ISA allowance, provided the ISA is no longer active.7

Flexible ISAs containing assets from previous tax years and the current tax year work like this:

Withdrawals

1. From money contributed in the current tax year.
2. From money contributed in previous tax years.

Replacement contributions

1. Replace previous tax year’s withdrawals.
2. Replace current tax year withdrawals.
3. Reduce your remaining ISA annual allowance.

All replacement contributions must happen in the same tax year as the withdrawal.

Some providers say the withdrawal has to be replaced in the same ISA account you took it from.

More quirky than an octogenarian British actor

The ISA rules enable you to put your withdrawn money back into different ISA type(s) with the same provider, if they make that facility available.

Check your provider’s T&Cs. Or send them thousands of emails in BLOCK CAPITALS until they respond.

A flexible stocks and shares ISA allows you to replace the value of cash withdrawn. You can’t replace the value of shares, or other investment types that you moved out of the account, should they afterwards change.

You can sell down your assets, withdraw the cash, and then replace that cash later in the tax year, and buy more assets with it.

Dividend income should also be flexible in a flexible ISA scenario.

If you transfer your flexible ISA to another provider, then check its product is also flexible.

You may lose the ability to replace withdrawals if you don’t replace them before you transfer a flexible ISA. Again, this is determined by your provider’s T&Cs rather than the rules. (Subject them to a paid Twitter campaign to get an answer on this one.)

If your withdrawals result in your account being closed, your provider can allow you to reopen your flexible ISA in the same tax year and replace the money. That applies to old and new ISA accounts.

Again, check with your provider. (Via a billboard installed outside their office if need be.)

Flexible ISA hack to build your tax-free ISA allowance

1. Open a flexible, easy access cash ISA that accepts ISA transfers.
2. Transfer your non-flexible old ISAs into the flexible ISA.
3. Your flexible ISA now accommodates the value of the old ISAs – say £40,000.
4. If your flexible ISA doesn’t pay table-topping interest then withdraw your cash and spread it liberally among the humdinger savings accounts of your choice, or an offset mortgage.
5. Move your cash back into the flexible ISA by 5 April of the current tax year. Fill as much of the current year’s ISA allowance as you can, too. For instance another £20,000.
6. In our example, you now have £40,000 + £20,000 = £60,000 tax-free and flexible.
7. From April 6 of the new tax year: withdraw your cash and liberally spread it.
8. Repeat as required.

This method builds up a large and flexible tax-free shelter. One that could prove valuable later in life, when you have more money to tuck away.

For example, perhaps it could become a place to shelter and grow your 25% tax-free pension cash when you take it. This could be instantly transferred into a stocks and shares ISA, come the day.

Or maybe you’ll sell a business, or receive some other windfall.

Watch out for the £85,000 FSCS compensation limit (see below). Open a new flexible ISA with a different authorised firm before you go over that line.

What happens if you exceed the ISA allowance?

HMRC should get in touch if you exceed the ISA allowance. You may be let off for a first offence, but otherwise it will instruct your ISA provider on what action to take.

Action is likely to include your extraordinary rendition to an offshore black site where you will be forced to read HMRC compliance manuals for the rest of your life.

Alternatively, HMRC may require overpayments and excess income to be removed from your account. And also invite you to pay income tax and capital gains (potentially on all assets in the ISA) from the date of the invalid subscription until the problem is fixed.

Eek!

Your ISA provider may also charge you a fee for the hassle.

You can similarly get into hot water for dropping new money into your ISA as a UK non-resident, or for breaching the one-type-of-ISA-a-tax-year rule, or for breaking the age restrictions.

You can call HMRC on 0300 200 3300 to discuss all this.

Just don’t expect them to admit to the Deep State stuff. Open your eyes sheeple! [Editor’s note: we’re joking.]

FSCS compensation scheme

What if your ISA provider goes bust and your money can’t be recovered? In that case the Financial Services Compensation Scheme (FSCS) waits in the wings.

• Cash – You can claim up to £85,000 compensation on cash held with each authorised firm.

• Stocks and shares – It’s more complicated, quelle surprise. But you can claim up to £85,000 compensation on investments held with each authorised firm.

• Innovative Finance – Not covered by the FSCS. You’re on your own.

Watch out for the definition of an ‘authorised firm’. Often multiple brand names sit under the same authorised firm umbrella.

For example, if you have cash at HSBC and First Direct then you’re only covered for £85,000 across both. They are one and the same authorised investment firm.

Investments parked at the same bank should be covered for another £85,000. That’s on top of your cash.

• The Bank of England provides a list of authorised firms and their ultimate parents. It appears to be updated every couple of years.
• Check the FCA’s Financial Services Register. 
• Firms with matching FRN numbers (also known as registration numbers) are sister brands that only provide you with £85,000 of compensation cover between them. 

Inheriting an ISA

The tax-free benefits of an ISA can be passed on to a surviving spouse or civil partner. 

(We’ll refer to a ‘spouse’ in the rest of this section but the ISA inheritance rules apply equally to a civil partner. Unfortunately they do not apply to unmarried partners). 

Upon death, all types of ISA (except a JISA) transform into a ‘continuing account of a deceased investor’. 

This so-called ‘continuing ISA’ can then grow tax-free until the deceased’s affairs are settled. 

The tax benefits of the deceased ISAs transfer to their spouse using an Additional Permitted Subscription (APS). 

The APS is a one-time ISA allowance that enables the surviving spouse to expand their ISA holdings up to the value of the deceased’s ISA accounts. 

By this mechanism, the tax-free status of the deceased’s ISAs are passed on to their spouse. 

Unfortunately, the rules descend into a bureaucratic quagmire from here. 

ISA inheritance rules for the Additional Permitted Subscription

A surviving spouse qualifies for the APS even if the ISAs are actually willed to someone else. 

However, a spouse does not qualify if the couple are not living together at the time of death, or the marriage has broken down, they are legally separated, or in the process of being legally separated. 

The value of the APS is the higher of:

• The ISA’s worth at the date of death
• Its value when the continuing ISA account is finally closed (assuming part of the APS hasn’t already been used)

The APS must be claimed separately from each of the deceased’s ISA providers. 

You can choose which of the two valuation options above apply to each ISA provider. You don’t have to pick one option that applies across the board with every provider

The APS can be used from the date of death. 

Although you’d normally expect an APS to be funded by the inherited ISA assets, this is not necessary. An APS can be fulfilled by any assets the spouse owns. 

The APS must be used within:

• Three years from the date of death
• 180 days after the completion of the administration of the estate, if that’s later. 

The APS does not interfere with the spouse’s own ISA allowance. They get that as normal. 

APS subscriptions count as previous tax year subscriptions.

Therefore a spouse cannot break the one-type-of-ISA-a-tax-year rule when they use their APS. For example, by filling a new stocks and shares ISA after already opening one in the current tax year. 

You should check the terms and conditions of all your ISAs to ensure they adhere to APS provisions. ISA providers aren’t automatically obliged to comply with the APS rules. 

APS rules per ISA provider

One common restriction is that the spouse must use their APS with the same provider that runs the deceased’s ISA account. This leads to extra complications, as we’ll cover below. 

As mentioned, the APS is divided into separate amounts that align to the value of the deceased’s continuing ISA accounts – as held with each of their providers.

For example:

• A continuing ISA worth £100,000 is held with provider A
• A continuing ISA worth £50,000 is held with provider B

The surviving spouse can now fund up to £100,000 of APS in ISAs with provider A, and up to £50,000 with provider B. 

You can’t fill ISAs worth £75,000 with both providers. You can only ‘spend’ up to the limit of each APS per provider. 

However, you can split each APS between any number and type of ISA per provider. (Although there are restrictions on the Lifetime ISA.)

You can fill both new and existing ISAs with each provider. 

Transferring inherited ISA assets

In specie transfers from a continuing stocks and shares ISA must be made within 180 days of the assets passing into the beneficial ownership of the surviving spouse.

The in specie transfer can only be made to a stocks and shares ISA held by the spouse with the continuing ISA’s provider. 

The assets must be the same as those held on the date of death. 

Alternatively you can sell the investments for cash. The money can then be used to fund the APS with slightly fewer restrictions. 

You can always transfer your ISAs to another provider as normal – after you’ve used your APS. 

Lifetime ISA APS restrictions 

You can’t open a new Lifetime ISA unless you’re aged between 18 to 40. 

You can’t pay into an existing Lifetime ISA unless you’re under 50. 

The APS does use up your £4,000 annual Lifetime ISA allowance. 

You can’t pay APS into a Lifetime ISA if you’ve already paid into one in the current tax year. 

A continuing ISA’s tax-free growth limits

Before the deceased assets are transferred via the mechanism we’ve just described, they grow tax-free in continuing ISAs until:

• Completion of the administration of the estate
• The accounts closure by the deceased’s executor
• Three years and one day after the date of death. Then the account can be closed by the ISA provider 

The earliest of these dates applies. 

The value of the deceased’s ISA holdings count towards their estate. The tax-free benefits are only passed to a surviving spouse. 

Inheritance ISAs are a marketing label not an additional type of ISA. Every ISA can be inherited as described above. But please check your provider’s T&Cs for additional restrictions. 

What happens to my ISA if I move abroad?

You can still put new money into your ISA for the remainder of the tax year when you stop being a UK resident. But you can’t contribute new money again until your residential status changes back.

Your ISA assets will continue to grow free of UK tax. But watch out! Your new country of residence may demand a slice.

In addition:

• You should still be able to transfer ISAs without losing your tax exemption.
• Ditto for withdrawing money from a flexible ISA and replacing it.
• Ditto for inheriting an ISA.

Check with your provider before doing anything, just to be safe.

You should also tell your ISA provider when you’re no longer a UK resident. The UK means England, Wales, Scotland, and Northern Ireland. The Channel Islands and the Isle of Man are excluded.

If you split your time between the UK and other territories you can do a residency test. This will determine your status. Fun!

You don’t lose your ISA annual allowance if you’re a Crown employee serving overseas, or their spouse / civil partner.

Any questions?

Well, we’re sure this brief post has cleared everything up… But do let us know in the comments if we’ve missed a bit.

Take it steady,

The Accumulator

Note: This article on the ISA allowance was updated in February 2024. Reader comments below may refer to an older version. Check the date to be sure.

1. Also known to the government but to nobody else as the ‘subscription limit’.
2. Exceptions: funds in a Junior ISA before the child reaches age 18, Lifetime ISA, Innovative Finance ISA loan lock-ins, and fixed-term/regular saver Cash ISAs where you’ll pay various penalties for early release.
3. Max per year, per person.
4. per child
5. The max contribution into a LISA is £4,000 a year.
6. Disclaimer: exaggeration for comic effect.
7. That is to say you’re no longer filling it with new money.

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