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A guide to tax-free savings accounts

30.07.2021

By Beehive Money

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Tax-free ISAs explained

If you’re saving for the future – maybe a house, retirement fund, or even that dream holiday – then it’s worth thinking about the right home for your money. With an ISA (Individual Savings Account), you can earn interest on your savings without having to pay tax, which can help your money grow even faster.

How much could I save in an ISA?

It depends on the ISA you’ve opened – a Lifetime ISA has an annual limit of £4,000 – but overall, you’ll have an ISA allowance of £20,000 to spread around each year. Even better, the ISA allowance doesn’t count towards your £1,000 personal savings allowance.

How many ISAs are there?

Good question. There are lots of options to choose from, but they fall into a few camps.

Cash ISA – these are pretty much the same as your typical savings account, but any interest you’ll earn is totally tax-free. There are a few account types within this umbrella, including instant access, notice, and fixed rate. We’ve put together a guide to savings terms, so check it out if you need more info. Just so you know, you can put £20,000 away each tax year in a Cash ISA.

Junior ISAs
- the annual ISA allowance limit on Junior ISAs is £9,000 for the current tax year and you can save for an under 18 in these from birth. They’ll have access to the savings when they turn 18. 

Stocks & Shares ISA – these usually lock your money in for at least five years – a great option if you’re easily tempted to spend – and cover unit trusts, open-ended investment companies, investment trusts and both Government and corporate bonds. You’ll be protected from capital gains tax (or tax on your profit), income tax and dividends tax (profits you get from shares in a company), but as investments can go up and down, it’s possible you’ll get back less than you put in. As with Cash ISAs, you can put away up to £20,000 each year.

Lifetime ISA
– great for building a retirement fund or saving up for a first home, you can put away £4,000 each tax year (which comes off your £20,000 ISA allowance). The Government adds a 25% bonus on top, worth up to £1,000 per year. However, withdraw your cash for almost any reason other than retirement (aged 60) or your first home, and you may need to pay a 25% Government fee.

How much can I save in an ISA?

We’ve touched on this already, but just to simplify you can put a maximum of £20,000 into an ISA with up to:
  • £20,000 per year in a Cash ISA
  • £20,000 per year in a Stocks and Shares ISAs
  • £4,000 per year in a Lifetime ISA
You can split the £20,000 across different types of ISA accounts (for instance, some in a Stocks and Shares ISA and some in a LISA), as long as you check the limits on your account. So, for example, you could pay up to £4,000 per year in a LISA, and £16,000 in a Stocks and Shares ISA.

Can I switch providers? 

Of course – whenever you want. But, it’s worth knowing exactly what’s involved.
  • Any money you’ve saved in previous tax years can be transferred without affecting its tax-free status, and it won’t count towards the current tax year’s ISA allowance.
  • Your provider will handle the move – so don’t close any accounts. If you do, you might lose the tax-free status. Be sure you check all the details before you make the switch, as some providers charge a fee for doing this.
  • If you transfer money from a Stocks and Shares ISA into a Cash ISA, you’ll need to move the lot.

Can I withdraw money from my Cash ISA? 

Yes, but check the terms of your account and be aware that you might lose the tax-free status if you do this. Also, even if you withdraw money, it still counts towards your £20,000 ISA allowance unless it’s a flexible ISA – there’s more on that here.

What’s my next step?

There’s lots you can do. Browse our range of ISA accounts, get in touch with a Customer Advocate for more info. You can also check out our blog,The Hive for more helpful articles and handy tips on the world of saving.

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