What does the personal savings allowance mean in terms of cash ISAs and other tax-free savings vehicles?

The interest you earn on a cash Individual Savings Account (ISA) is tax-free. ISA earnings do not count toward the PSA.

There are also a number of Treasury-backed NS&I products that are tax-free, such as fixed interest and index-linked National Savings Certificates and Premium Bonds. Income or awards from these goods are also not counted against the PSA.

What is the impact of the personal savings allowance on a joint account?

Both account holders are entitled to a personal savings allowance, which they can apply to their interest share.

Could you please tell me more about ISAs?

Individual Savings Accounts allow you to save tax-free (ISAs). Individuals residing in the United Kingdom have access to them. The following section provides an overview of the many forms of ISA.

You are not required to report ISA income to HMRC. Income from an ISA does not count toward the personal savings allowance. GOV.UK has more information about ISAs, including eligibility requirements.

The maximum you can invest in any sort of ISA (excluding Junior ISAs) during 2022/23 is £20,000.

If you have a matured child trust fund, you can transfer it into an ISA without affecting your annual ISA subscription limit.

Interactions with means-tested benefits should be explored if you want to open an ISA. Unlike pension savings, money deposited in ISAs is considered capital and might affect a claim for benefits such as universal credit. You should also ensure that you understand when you can withdraw your money and for what purpose, as well as whether the investment is appropriate for your circumstances. Consider obtaining financial advice; the Financial Conduct Authority provides information on how to find an adviser.

Please keep in mind that specific regulations apply if your spouse or civil partner dies with ISA assets at the time of death. For additional information, please see our bereavement guide.

ISAs for cash

Cash ISAs are simple cash accounts in which you can earn tax-free interest on your cash savings if you are 16 or older.

You can withdraw funds from cash ISAs whenever you choose without incurring any penalties from the government. If you have a 'fixed-term' cash ISA, you must check to see if you can access the funds before the fixed period expires. Even if you can, your ISA provider may charge you a penalty for withdrawing early.

Cash ISAs can be either 'flexible' or 'inflexible.' If the ISA is flexible, you can remove money from it and return it during the same tax year without the funds counting against the £20,000 subscription limit. You should check with your supplier because not all ISAs are adaptable.

ISAs for stocks and shares

An Individual Savings Account (ISA) can be opened for stocks and shares if you are at least 18 years old.

With stocks and shares ISAs, you can sell the assets at any time without penalty, and there is no minimum holding period. When selling investments under a stocks and shares ISA, there is no capital gains tax. Similarly, if you sell the investments at a loss (for less than they were purchased for), you cannot claim tax relief for the loss.

However, unlike flexible cash ISAs, taking the sale earnings out of the account and re-investing them will count against your ISA subscription cap.

ISAs for Innovative Finance

Individuals over the age of 18 can use Innovative Finance ISAs to invest in peer-to-peer loans rather than cash or equities and shares.

If money in an Innovative Finance ISA are assigned to a loan, you may not be able to access them readily. You should consult with the service provider. A fee may be charged.

If you remove money from an ISA and then re-invest it, it will count towards your ISA subscription allowance, just as stocks and shares ISAs.

ISA for Life

If you are 18 or older but under 40, you can open a Lifetime ISA. They want to help you save for a down payment on your first house or prepare for retirement until you're 50.

The government provides a tax-free incentive of £1 for every £4 placed into a Lifetime ISA, so someone who saves the maximum £4,000 each year will receive an additional £1,000. If you are a basic rate taxpayer, this is the same as the tax relief you would receive if you invested £4,000 in a relief-at-source pension.

If you withdraw Lifetime ISA money for any reason other than to buy your first home, after the age of 60, or if you are terminally ill, you must generally pay a 25% penalty on the amount taken. This may imply that you receive less than you invested.

For example, if you placed £4,000 in a Lifetime ISA and received a £1,000 government bonus, you would have £5,000 in the account if the investment value remained constant (and assuming the provider has not made any charges). If you tried to close the account right now, the 25% withdrawal penalty would apply (£5,000 x 25% = £1,250 penalty).

The 25% withdrawal penalty was temporarily reduced for withdrawals made between March 6, 2020 and April 5, 2021.

Take note of the age restrictions for Lifetime ISAs as well. If you started one before the age of 40, you can save until the age of 50. However, if you are 40 or older, you will be unable to open a new Lifetime ISA. If you remove funds, you should consider keeping a Lifetime ISA open in case you want to invest in it later.