Individual Savings Accounts (ISAs) and their various predecessors offer savers the ability to hold cash or a wide range of investments, where gains are exempt from capital gains tax and income is received tax free. However, for some, the complexity around some of these vehicles has inhibited their full use within their financial plans.
When were ISAs introduced?
ISAs were first introduced in 1999 in response to Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs) being abolished in 1997.
Those who took advantage of the ISA from their inception have been able to make substantial fundings into these tax free vehicles – as well as enjoying 25 years of growth on their savings!
This is highlighted by the increasing number of ‘ISA millionaires’ in the UK who have managed to save at least £1 million. While there have been several formats and even more changes to restrictions, rules and funding limits, those that navigated these will have benefited hugely.
ISA flexibility
In 2013, the option to hold shares listed on the Alternative Investment Market (AIM) was introduced, giving savers the option to build an ISA portfolio qualifying for inheritance tax exemptions for the first time. Following the October 2024 Labour Budget, this relief has now been reduced to 50%.
Flexible ISAs were introduced in 2016, allowing savers to make withdrawals and return these funds to the ISA in the same tax year without it counting as a new subscription; caution is required for any investors, as not all ISAs are Flexible ISAs.
And finally, from 2017/18, the annual subscription allowance to ISAs increased to £20,000 per year, further increasing the effectiveness of ISAs. This remains £20,000 for the 2024/25 tax year.
Which ISA?
In recent years, further iterations of the ISA have been introduced:
- IFISAs – Innovative Finance ISAs, providing access to peer-to-peer lending
- LISAs – Lifetime ISAs to encourage saving for house purchase or retirement with a Government ‘top-up’ of 25% – the Lifetime ISA limit of £4,000 counts towards your annual Iimit
- JISAs – Junior ISAs allowing savings for children up to age 18
- HTBISA – Help to Buy ISAs to assist savers from age 16 in the purchase of a first home (no longer available)
While most of these products have helpful applications, it has been suggested that the increase in options has led to perceived complications with ISAs. Previously, relative simplicity compared to other options, such as pensions, had been a strength of ISAs.
What does the future hold?
One of the changes announced in the October 2024 Budget was an increase in the rates of capital gains tax (CGT) payable by individuals on disposal of assets held outside of tax-shielding structures. Any gains made from chargeable assets after 30 October 2024 are now chargeable at 18% (up from 10%) for basic-rate taxpayers, and 24% (up from 20%) for higher and additional-rate taxpayers. Residential property gains remain at 18% for basic-rate taxpayers and 24% for higher-rate taxpayers. As a result of these changes, the use of ISAs has greater effectiveness in improving the tax efficiency of an individual’s savings and investments.
In summary, ISAs play an extremely valuable role in an individual’s financial planning and are frequently complemented by other tax-efficient wrappers. As a financial adviser, it’s our role to guide clients on which strategic tax wrappers are most suitable, depending on their individual objectives. If you would like to discuss ISAs, or wider holistic financial planning in more detail, then please speak with your Mattioli Woods wealth management consultant.
Content correct at time of writing (December 2024).
This article was written by Wealth Management Consultant, Justin Hunt.
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