Individual savings accounts (ISAs) were introduced on 6 April 1999, replacing the earlier Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs). ISAs are tax exempt cash, stocks and shares and/or innovative finance accounts under which any income received in the form of interest and dividends is free of tax, and on which there is exemption from capital gains tax on any capital growth. The estimated Exchequer cost of the tax relief for ISAs in 2018-19 was around £3.3 billion.
Savings that are newly invested in an ISA account in a particular tax year are referred to as ISA ‘subscriptions’, although income earned in an ISA account remains tax free whether or not further subscriptions are made. The value of savings accumulated in an ISA account (as measured at the end of the tax year) including capital growth and any interest and dividend income retained in the account is referred to as ISA ‘holdings’.
Because the subscription limits are tax year based, ISA statistics are analysed using income tax years (running 6th April to the following 5th April).
Adult ISAs
ISAs initially comprised three types of account: cash, stocks and shares, and life insurance. Insurance ISAs enabled savers to invest with insurance companies in funds offering potential for higher returns than cash ISAs at lower risk than stocks and shares ISAs. However, there was a relatively low uptake for these accounts and the separate life insurance ISA was abolished in April 2005.
Following a comprehensive review, changes to ISAs were announced in July 2007. From April 2008 the previous mini/ maxi distinction was abolished in favour of a simple cash and stocks and shares distinction with an overall limit on the amount that could be invested in any one tax year, and rules concerning the maximum that could be invested in cash.
Since the review, the main features of ISAs are as follows:
- There are four main types of ISA – cash ISA, stocks and shares ISA, innovative finance ISA and Lifetime ISA. Lifetime ISAs can hold cash and/or stocks and shares;
- In each tax year individuals may subscribe to separate cash, stocks and shares, innovative finance and Lifetime ISAs;
- There is no income tax to pay on the income received from ISA savings and investments, nor is there any tax to be paid on capital gains arising from ISA investments;
- Individuals have the right to access their investment at any time and there are no statutory lockin periods;
- Each ISA manager must offer the ISA holder the opportunity to transfer their account to another manager. Funds invested in a stocks and shares ISA can only be transferred to another stocks and shares ISA; however funds invested in a cash ISA can be transferred either to a stocks and shares ISA or another cash ISA;
- Investments in approved life products can be held in either a cash ISA or a stocks and shares ISA;
- There is no life time limit on the amount that can be saved in an ISA(other than the annual subscription limit) or on the amount of income that can be earned tax free.
- Lifetime ISAs face different subscription limits of £4,000 per year, and face certain withdrawal charges for early access except in certain cases such as retirement or the purchase of a first home.
Junior ISAs
Junior ISA accounts have been available since 1 November 2011 to children under the age of 18 who do not own a Child Trust Fund account (available to eligible children born on or between 1 September 2002 and 2 January 2011). Unlike an Adult ISA the savings in a Junior ISA account cannot be withdrawn until the child reaches 18. Only then can the savings either be withdrawn or the balance transferred into an Adult ISA. Adult cash ISAs are available to children from the age of 16, and eligible children can hold both a cash Junior ISA as well as an Adult cash ISA from that age. Children can open a cash as well as a stocks and shares account.
Help to buy: ISAs
The Help to Buy: ISA scheme was launched on 1 December 2015 with accounts available through banks, building societies and credit unions. The scheme enabled people saving for their first home to receive a 25% bonus to their savings from the government when they bought a property of £250,000 or less (£450,000 in London). This meant that for every £200 saved, first-time buyers could receive a government bonus of £50. The maximum government bonus was £3,000.
The scheme was closed to new accounts on 30 November 2019, though Help to Buy: ISA account holders can continue saving into their account until 30 November 2029 when accounts will close to additional contributions. The Help to Buy: ISA government bonus must be claimed by 1 December 2030.
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