Current ISA rules

Current ISA rules

An ISA (Individual Savings Account) is a tax-efficient wrapper that can be applied to savings and investments. This means that any income or dividends that you receive from investments or savings along with any capital gains is tax-free. Anyone aged 18 or over can invest in a Stocks and Share ISA, however you only need to be 16 to invest in a Cash ISA.

The current ISA allowance (which has been in effect since 6 April 2017) is £20,000 and will be applicable until the end of the tax year (5 April 2018). If you do not invest your full allowance during the tax year, you cannot carry over any remaining amounts into the next tax year.

The current ISA offers flexibility that has not previously been available to investors. You can now choose to split your allowance between Cash and Stocks & Shares as you wish. For instance, you could invest the full £20,000 allowance into a Cash OR a Stocks & Shares ISA. Alternatively, you could invest your allowance in any combination of amounts between a Cash and Stocks & Shares ISA up to the £20,000 allowance.

ISA rules state that you can only subscribe to one ISA provider in any one tax year. However, if you choose to invest with a platform (also known as a 'fund supermarket') such as Aegon or Fidelity FundsNetwork, you have the opportunity to invest in a wide range of funds from various fund providers in the same tax year.

The current ISA allows for investors to transfer from a Cash ISA to a Stocks & Shares ISA and vice versa. When it comes to transferring a previous year's ISA, you can transfer from one provider to another whilst retaining the ISA wrapper. This will not affect your allowance for the current tax year. Please note that if you wish to transfer an ISA, you should not encash the investment yourself as any investment you make into an ISA after withdrawing funds will count towards your £20,000 allowance.

Investors can now pass on their Individual Savings Accounts (ISAs) to their spouse when they die and keep their tax free status.

Previous rules had removed the tax-exempt status of ISAs on the saver's death, meaning their widow would have to start paying tax on the total amount held within the ISA wrapper. We believe this is a welcome and long overdue change which has previously been the cause of much frustration at what would be a difficult time.

From April 2016 the Dividend Tax Credit will be replaced by a new tax-free Dividend Allowance. The Dividend Allowance means that you won't have to pay tax on the first £5,000 of your dividend income, no matter what non-dividend income you have. The allowance is available to anyone who has dividend income. Headline rates of dividend tax are also changing.

You'll pay tax on any dividends you receive over £5,000 at the following rates:

  • 7.5% on dividend income within the basic rate band
  • 32.5% on dividend income within the higher rate band
  • 38.1% on dividend income within the additional rate band

This simpler system will mean that only those with significant dividend income will pay more tax. If you're an investor with modest income from shares, you'll see either a tax cut or no change in the amount of tax you owe.

Dividends received by pension funds that are currently exempt from tax and dividends received on shares held in an ISA, will continue to be tax free. From April 2016 you have to apply the new headline rates on the amount of dividends you actually receive, where the income is over �5,000 (excluding any dividend income paid within an ISA).

The Dividend Allowance will not reduce your total income for tax purposes. However, it will mean that you don't have any tax to pay on the first £5,000 of dividend income you receive. Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £5,000 allowance. The way the allowance will work in different situations is demonstrated in the examples below.

Where appropriate to the calculations, the examples use the limits that will apply from April 2016:

  • Personal Allowance: £11,000
  • Basic Rate Limit: £32,000
  • Higher Rate Threshold: £43,000

Example 1

"I have a non-dividend income of £20,000, an ISA dividend income of £4000 and receive dividends of £6,000 outside of an ISA"

As is the case now, no tax is due on dividend income within an ISA, whatever rate of tax you pay. You won't need to pay tax on the first £5,000 of dividends due to the Dividend Allowance, but will pay tax on £1,000 of dividends at 7.5%.

Example 2

"I have a non-dividend income of £40,000, and receive dividends of £9,000 outside of an ISA"

Of the £40,000 non-dividend income, £11,000 is covered by the Personal Allowance, leaving £29,000 to be taxed at basic rate.

This leaves £3,000 of income that can be earned within the basic rate limit before the higher rate threshold is crossed. The Dividend Allowance covers this £3,000 first, leaving £2,000 of Allowance to use in the higher rate band. All of this £5,000 dividend income is therefore covered by the Allowance and is not subject to tax.

The remaining £4,000 of dividends are all taxed at higher rate (32.5%)

Direct or Platform

Direct or platform?

The difference between investing direct or through a fund supermarket (platform)

Direct or platform?

Junior ISAs Explained

Junior ISAs explained

What is a junior ISA and who can invest in them

Junior ISAs

Investment Types

Investment types

Find out what types of investments are available

Investment types

Which fund is right for me?

Which fund is right for me?

Unsure what fund to invest in? We may be able to help you decide

Fund choice

Income or Growth?

Income or growth?

An explanation on the difference between taking income from your investment or letting it accumulate

Inc. or acc.?