What Is the British ISA and How Does It Work? (2024)

FAQs

What ISA British ISA and how does it work? ›

A British ISA - individual savings account - is a new way to invest in UK companies without paying tax on the interest or returns. The new ISA was announced during the Spring Budget by chancellor, Jeremy Hunt. He revealed plans to reform the ISA system and encourage more people to invest in UK assets.

It's called the 'UK ISA', though you might have heard it called the 'British ISA' by the media. The new UK ISA will have an additional £5,000 allowance, which is on top of the existing £20,000 allowance across other types of ISAs. The goal is to encourage individuals to invest in UK assets.

Individual Savings Accounts (ISAs) are popular with savers because of their tax efficiency. There are several different types of ISAs available. Each type has advantages and disadvantages, with some being more suited to specific savings goals and risk appetites than others.

At Spring Budget 2024, the government announced the introduction of the UK ISA . The new £5,000 allowance, in addition to the existing ISA allowance, will provide a new tax-free savings opportunity for people to invest in the UK, while supporting UK companies.

Putting money into an ISA

Every tax year you can save up to £20,000 in one account or split the allowance across multiple accounts. The tax year runs from 6 April to 5 April. You can only pay into one Lifetime ISA in a tax year. The maximum you can pay in is £4,000.

At a glance: The ISA allowance for 2024/25 is £20,000, unchanged from the last tax year. This means you can pay £20,000 into ISAs from 6 of April 2024 to the 5 of April 2025.

ISA stands for Individual Savings Account. ISAs are a tax-efficient way of saving money. You can save or invest up to a set amount (your ISA allowance) each tax year and you don't pay any tax on the income or capital gains (for an investment ISA, like ours) or on the interest paid (for a cash ISA).

Saving your money in an ISA will mean you can be sure that you will not be charged tax (providing that you do not exceed your annual investment allowance of £20,000). Investing in an ISA guarantees that any interest will remain tax-free no matter how high the interest rates rise.

Saving or investing in an ISA offers some great tax-related benefits. The best part is, you don't pay tax on the growth, returns or interest in your ISA. This means, if you have a cash ISA, all interest earned in the ISA is always tax free.

Stocks and shares ISAs carry a higher risk as well as a higher potential for rewards, depending on where the money is invested. It's important to work with an independent financial advisor if you're investing in a stocks and shares ISA because there may be a possibility of capital loss.

Why an ISA is better than a pension? ›

Unlike a pension, putting your money in a stocks & shares ISA means it's not locked away until you're at least 55. This gives you the potential to do more with it, be it taking a sabbatical to go travelling, starting a new business, or something else entirely.

An Individual Savings Account helps you to save and invest tax efficiently. There are four different kinds of ISA: a cash ISA, a stocks and shares ISA, a Lifetime ISA, an innovative finance ISA.

"For most people with fixed rate cash ISAs, I can't promise everyone, but certainly enough of you very close to the end of it should be ditching them, paying the penalty, and putting them [the money] in somewhere that pays more at the moment."

In situations where you have saved in excess of this sum in your ISAs in the tax year, you will need to discuss with your ISA providers, the removal of the excess from your ISA, incuding any interest the excess generated, and return it to you. The excess interest is taxable and should be declared.

You can take your money out of an Individual Savings Account ( ISA ) at any time, without losing any tax benefits. Check the terms of your ISA to see if there are any rules or charges for making withdrawals. There are different rules for taking your money out of a Lifetime ISA.

There is a similar structure in the U.S., namely the Roth IRA, which has similar benefits to an ISA. All contributions grow free from income and capital gains tax and in addition, there are no taxes or penalties if you want to take out the capital you have put in (excluding income and gains).

An ISA allowance is the maximum amount a person is able to save in ISAs per tax year. In the UK, the tax year runs from the 6th of April to the 5th of April the following year. You can choose to split your ISA allowance across different types of ISAs or invest it all into one ISA account.