The Government has announced there will be changes to ISA allowances
Financial journalist Martin Lewis has shed light on how ISA allowances work for the tax-free savings pots. Brits can currently stash away up to £20,000 annually into ISA accounts, with the flexibility to divide this sum between cash ISAs and stocks and shares ISAs.
A major perk of ISAs is that all interest earned or investment gains within these accounts remain completely tax-free, provided you don’t exceed your annual limit. A listener contacted his BBC podcast to ask how the yearly thresholds work.
They posed a theoretical case where someone puts away the full £20,000 in one tax year, then deposits another maximum £20,000 on day one of the new tax year. The query was whether the initial £20,000 would face taxation, given they’d have accumulated £40,000 in total by the close of year two.
The same question was reframed differently, asking whether saving £20,000 annually over a four-year period, building up £80,000 in overall deposits, would all remain within the tax-free threshold.
Mr Lewis responded: “Simple answer, yes you can. That’s exactly how it works. Your ISA allowance is an annual allowance. Once the money is in a cash ISA or a stocks and shares ISA, it remains tax-free, in perpetuity, as long as it’s inside the ISA wrapper.”
The financial expert went on to clarify the rules around ISA allowances, saying: “You can put the maximum ISA allowance in this year and then you can put a whole new ISA allowance in at the start of the next tax year, and the same the tax year after that, and the same the tax year after that. That’s the way ISAs work, and that’s what enables people to build money in it.”
A common mistake
However, Mr Lewis also highlighted a common misunderstanding about ISAs. He said: “Just to be clear on this, people are always worried that when they have a cash ISA and they want to transfer it to a new cash ISA provider to increase the rate, that that will use up their annual allowance.
“It doesn’t – the allowance is simply on new money that you are putting in ISAs, that has not been in ISAs before. Money already in ISAs, even if you’re transferring it from a cash ISA to a shares ISA, does not use up your annual allowance.
“There’s no timing issue on doing it. It’s only new money going in that affects how much you in future.”
Changes to ISA rules
ISA savers should take note of a significant change to ISA allowances announced in the Autumn Budget. From the April 2027 tax year, the £20,000 allowance will still apply, but only £12,000 of this can be used for either cash ISA or stocks and shares ISA deposits.
The remaining £8,000 can only be allocated to stocks and shares ISAs. The new rules won’t affect those aged over 65, who will keep the current £20,000 allowance.
Another important ISA limit to consider is the junior ISA allowance, which is separate from the £20,000 adult allowance and is available for children under 18. You can deposit up to £9,000 a year into these accounts for a child, and this allowance will remain unchanged until April 2031.
Parents or guardians with parental responsibility can open a junior ISA and manage the account, but the money belongs to the child. The child can take control of the account when they turn 16, but they can’t withdraw the funds until they are 18.
