Are savers making the most of their tax-free ISA allowance?

What do savers need to know about ISAs?

Consumers often can feel overwhelmed when it comes to ISAs. There’s a perception that there’s lots of rules, lots of different products, and not knowing where to start. In some cases this can be off-putting. 

But it’s simple when it’s been broken down. The starting point is to remember that ISAs all have one thing in common: a tax-free wrapper. 

And when savers are thinking about what’s right for their money, there are two things to keep in mind: the annual allowance, and the types of ISAs available. 

Let’s start with the overall allowance. In other words, this is the amount someone can save per tax year – set by the Government – and that’s currently £20,000. So, if a saver were to pay up to £20,000 into an ISA before 5 April, that amount can continue to grow until it’s withdrawn and they won’t have to pay any tax on the interest that’s earned. 

When the new tax year starts on 6 April, the contribution limit will reset and a further £20,000 can be added. 

The next thing for savers to be aware of is the different types of ISAs available. What’s right will depend on an individual’s savings or investments need, and their risk appetite. 

Before we look at the different options available to savers, remember that the £20,000 annual limit can be split across different ISA products – but a saver can’t go over that total limit, and can’t currently pay into more than one of each type of ISA. 

What are the different types of ISA, and what are they for?

There are five main types of ISA that savers can open, and with announcements in the recent Spring Statement there’s about to be a sixth: The British ISA. 

But before we get into this new option, let’s look at the more common types of ISAs and why savers might consider them:

Cash ISA

This is a really popular type of ISA which helps people to save, and earn interest on the money they’re saving. These generally offer lower growth and lower risk; but the money is secure. There are also lots of options available. If savers want to lock their money away for year and won’t withdraw funds, they’ll likely secure a higher interest rate. There’s lots of other instant-access products that allow people to make withdrawals throughout the tax year if they need to. 

Stocks and shares ISA

If savers want to take a little more risk with the aim of getting a higher return, they could invest in a stocks and shares ISA. These allow savers to hold a range of investments and any income or gains they make are free from UK income tax and capital gains tax. Investing in a stocks and shares ISA for at least five years helps smooth out market movements.

It’s worth remembering that investments can go down as well as up. Most providers offer stocks and shares ISAs – including Lloyds Bank which recently launched Ready Made Investments. People can choose from three different levels of risk based on what they feel comfortable with. 

Innovative finance ISA

We get a little more niche when we look at the third ISA option. In simple terms, an innovative finance ISA is where savers can invest in peer-to-peer lending and crowdfunding projects. It’s much riskier that the likes of a cash ISA or stocks and shares ISA but returns are likely to be higher.

Lifetime ISAs

These have been around since 2017 and are there to help people save for their first home or retirement. Savers could earn a Government bonus of 25% on the savings but can only use part of their ISA allowance each tax year. The lifetime ISA allowance is currently £4,000 and savers can only withdraw the funds to buy their first home or support retirement when they reach 60 and over – but savers need to beware the exit charge of 25% if they withdraw for any other reason. 

Junior ISAs

The junior ISA is specifically designed for children and a great way to help them get into a savings habit. There’s an annual savings limit of £9,000 – but, they are exempt from the individual £20,000 savings limit, meaning that a saver could max out their annual allowance and still save into the junior account for their child on top of this. 

What is the British ISA? 

The British ISA the biggest savings announcement in a long time. With the Chancellor just revealing this new type of ISA in the recent Spring Statement, there’s some things we already know.  

For starters, there’s an extra £5,000 tax-free allowance to invest in ‘UK-focused assets’. This will be on top of the existing £20,000 annual contribution limit for stocks and shares ISAs. 

What are we doing to help our customers this year?

We want to help our customers make the most of their money. In the last 12 months we’ve contacted over 15 million of our customers to let them know about changes to our rates – and that includes over 3 million customers likely able to benefit from choosing a different savings product and rate. 

We’ve also increased the interest offered on a number of our fixed rate ISA products – a good example of this is our Halifax, Lloyds Bank and Bank of Scotland 1 year Fixed ISAs which offer 4.45% AER.  

These products are part of a brilliant range we have to support customers’ different savings ambitions – whether that’s flexible ISAs which allow customers access to their money if they need it, right through to fixed products which can offer higher rates of interest. As well as cash ISAs, through our brands, we also provide stocks and shares, and Junior ISAs.

Customers can apply for these accounts easily through our mobile app and online. And we’ve got a whole host of useful information and tools, including a handy savings calculator.

It’s also easy for people to transfer from other providers to benefit from better interest rates. Details are available on our app and on our website. 

This article was originally published in March 2023.