How to beat the ISA maze

Author: Anna Bowes
08th March 2019

ISAs have been around for 20 years, having been introduced in April 1999 – and it’s fair to say that even the initial rules were fairly complicated. Of course, things have not got any simpler over the last two decades.

Maze on the beach

When first introduced, there were three different types of ISA to split your money between; the stocks and shares ISA (which you could put up to the whole allowance into), the cash ISA (which you could put up to £3,000 into) and an insurance ISA (into which you could deposit up to £1,000 per year).

As the insurance ISA was less popular and added an extra level of complexity, it was scrapped - which meant you could split your money between a cash and stocks and shares ISA only.

However, over the last few years there have been many rule changes and additional ISA types have been added to the mix, which means it’s now harder than ever to navigate the ISA maze.

There are currently four main types of ISA that your £20,000 annual allowance can be split between;

  • Cash ISA (including the Help to Buy ISA)
  • Stocks and Shares ISA
  • Lifetime ISA
  • Innovative Finance ISA
You can open one of each if you like but you cannot pay into more than one of each type in each tax year. And this can mean that some savers unwittingly find themselves unable to fully utilise their ISA allowance – which is a particular issue with cash ISAs.

The good news is that you can now deposit up to £20,000 into a cash ISA – the restriction of being able to put just half of your allowance into a cash ISA was lifted in 2015.

However, if you were to put £10,000 into a fixed rate cash ISA, which was subsequently closed to further deposits by the provider, you would be unable to open (or pay into) another cash ISA - even with the same provider - within the same tax year to utilise the rest of the allowance, as this would be viewed as subscribing to another cash ISA.

Similarly, if you were to open a Help to Buy ISA (which is a type of cash ISA) and deposit the maximum allowed, in the first year that would use just £3,400 of your £20,000 allowance (£1,000 initial lump sum and £200 per month) and just £2,400 in each subsequent year.

If you have more cash to deposit into an ISA, in general you cannot open another cash ISA – instead you would need to use one of the other options, which may not be appropriate for your own circumstances and plans.

However, all is not lost.

Firstly, the Personal Savings Allowance (PSA) - which has been available to basic and higher rate taxpayers since 2016 - means that for many, most interest, if not all, earned on cash in a savings account outside an ISA wrapper, is not subject to tax.

Basic rate taxpayers can earn £1,000 of interest per year before they have to pay tax, whilst for higher rate taxpayers it’s £500 per annum.

For those who find themselves close to or actually breaching the PSA that is applicable to them – or indeed additional rate taxpayers who do not have a PSA - it’s more important to make sure they can use their full cash ISA allowance if they are not using it elsewhere.

So, some providers have developed what is known as a portfolio ISA facility, which means that savers can open more than just one cash ISA with the same provider in the same tax year.

For example, Barclays is currently offering the market-leading Help to Buy ISA rate of 2.58% AER. However, the bank does not offer the portfolio ISA facility – so you would be unable to deposit more than the Help to Buy ISA limit each tax year.

Nationwide Building Society on the other hand has a Help to Buy ISA paying a competitive rate of 2.50% AER – but as it does offer the portfolio ISA facility, you could also open another cash ISA with them.

But not all providers offer this facility, so it’s yet another thing to take into consideration.

The other trap that some savers may fall into is whether to open a Help to Buy ISA or a Lifetime ISA.

Both of these offer an excellent Government bonus of 25% on each deposit made.

As the name suggests, the Help to Buy ISA is a savings account designed to help first time buyers – so the bonus is only paid on the completion of the purchase of your first home.

The Lifetime ISA has two objectives to save towards – the purchase of your first home or to go towards your retirement income.

The 25% bonus is added to the Lifetime ISA the month following each deposit that is made, so that the deposit and the bonus can earn interest until the account is cashed in.

But it can only be cashed in before the age of 60 if it is to be used for the purchase of your first home. If you try to take money out before the age of 60 for any other purpose, there will be a hefty penalty, which would wipe out any benefit of the Government bonus.

And as the Help to Buy ISA is a cash ISA and the Lifetime ISA is a stand-alone ISA type, you could open both in the same tax year – however crucially you could only use the 25% bonus from one of these vehicles for the purchase of your first home.

For more information about which of these types of ISA might be the most appropriate, read our article Third time’s the charm – or download our free factsheet, Lifetime ISA or Help to Buy ISA?

So, navigating the ISA maze can be challenging, with a number of rules and restrictions to be aware of and different options to choose between.

However, while complex at times, this stalwart of the savings market should not be dismissed out of hand, as you may find that you miss out on valuable tax-free interest both now and in the future.

For more information about all the ISAs available, you can also download our free Guide to Navigating the ISA maze


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