UK Individual Savings Accounts

An Individual Savings Account (ISA) is a type of savings account available to residents of the United Kingdom that qualifies for favorable tax treatment. If you save in an ISA you are entitled to keep all that you receive from that investment and not pay any tax on it. This is not the case with an ordinary bank or building society account, or a general investment account with a broker, unless you are a non-taxpayer.

ISAs began on 6 April 1999 and will be around for the foreseeable future. You can start with small amounts and save up to £20,000 in the tax year 2019-20. A tax year runs from 6 April to 5 April in the following year.

Introduction
There are two main types of ISA: a cash ISA placed in an interest paying account; and a stocks and shares ISA which is invested in bond, stock, or pooled investment instruments. These can be further divided into several different ISA types: a regular ISA; a Junior ISA; a Lifetime ISA; and an Innovative finance ISA.

Junior ISAs are intended for children, and are available in cash or stocks and shares ISAs. To qualify, a child must:
 * be younger than 18 years of age, and
 * live in the UK, and
 * cannot be entitled to a Child Trust Fund (CTF) account. Most children born between 1 September 2002 and 2 January 2011 did qualify for a CTF. Beginning in April 2015, Child Trust Funds can be converted into Junior ISAs.

Lifetime ISAs are intended for either retirement saving or saving for a home. The Government adds a 25% bonus to contributions, but unlike other ISAs, Lifetime ISA withdrawals can be made without penalty only after age 60 or when buying a first home. To qualify, a person must:
 * be older than 18 years of age and under 40 years of age, and
 * live in the UK.

Innovative finance ISAs are a special type of ISA, and may contain only peer to peer loans, crowdfunding debentures, and cash. Current offerings are limited to the main UK peer to peer lending platforms.

Contribution limits
In the tax year 2019-20, which ends on 5 April 2020, you can put in up to £20,000 into ISAs. Subject to this overall limit you can pay into each type of ISA in the tax year in any combination of amounts.

So, for example in 2019-20, you could put:
 * £10,000 into a cash ISA and £10,000 into a stocks and shares ISA, or
 * £3,000 into a cash ISA and £17,000 into a stocks and shares ISA, or
 * £4,000 into a Lifetime ISA, £3,000 into a cash ISA and £13,000 into a stocks and shares ISA, or
 * £2,000 into a Lifetime ISA, £4,000 into a cash ISA, £5,000 into an Innovative Finance ISA and £9,000 into a stocks and shares ISA, or
 * Nothing into a cash ISA and £20,000 to a stocks and shares ISA, or
 * £20,000 to a cash ISA and nothing to a stocks and shares ISA.

Cash ISA features
A cash ISA is just a tax-sheltered wrapper around a normal bank or building society savings account. However, most banks and building societies will offer slightly different interest rates for ISA and non-ISA savings accounts, with the ISA rate usually being the lower of the two.

A cash ISA may be 'flexible', in which case it is possible to take money out and replace it within the same tax year and without reducing that year's ISA allowance. Not all cash ISAs are 'flexible'.

Junior ISA features
The annual contribution limit for a Junior ISA for tax year 2019-20 is £4,368 per child per tax year. The limit is inflation adjusted each year.

The account is held in the child's name. A parent or guardian can open and manage the account. A child aged 16 or 17 can open their own ISAs. Anyone can contribute to a child's Junior ISA up to the annual limit.

No withdrawals permitted until the child attains 18 years of age, with an exception in the case of terminal illness or death. At 18, the ISA converts into a regular ISA, under the child's control. A Junior ISA has all of the same tax advantages as a regular ISA.

Lifetime ISA features
The annual contribution limit for the tax year 2019-20 is £4,000 per tax year. Contributions can be made up to age 50. The Government adds a bonus of 25% of contributions, up to a limit of £1,000 per year.

Withdrawal is penalty free if used to buy a first home or if aged over 60. Otherwise, a 25% withdrawal penalty applies. A Lifetime ISA has all of the same tax advantages as a regular ISA.

Tax considerations
You pay no tax on any of the income you receive from your ISA savings and investments. This includes dividends, interest and bonuses. You also pay no tax on capital gains arising on your ISA investments. Losses on ISA investments cannot be allowed for Capital Gains Tax purposes against capital gains outside your ISA.

The insurer does not have to pay tax on income and capital gains on investments used to back your ISA life insurance policies. You do not have to pay any tax when the policy pays out.

For regular ISAs, you can take your money out at any time without losing tax relief. For Junior ISAs and Lifetime ISAs, you can take money out without penalty provided you meet age related and other exemptions.

You do not have to declare income and capital gains from ISA savings and investments or even tell your tax office that you have an ISA.

Investors considering moving outside the UK, for example foreign nationals working temporarily in the UK, need to be aware that most countries will not honour UK ISA tax-free wrappers, but instead treat an ISA as an ordinary unwrapped trading account. Outcomes range from none, for example if moving to a country without an income tax such as the UAE, through to draconian, such as where the ISA holds funds or ETFs that run into conflict with the US's PFIC tax regime. This can argue for avoiding Lifetime ISAs, and also for cashing in the ISA entirely before leaving the UK.