By now, we’re sure you all know that having an ISA is a tax-efficient way for saving towards your financial goals. Since their introduction in 1999 they have grown and developed significantly.
Over the next couple of articles, we are going to take a look at two of the latest changes; Flexible ISAs and Inherited ISA allowances. We’ll begin with exploring Flexible ISAs.
An introduction to Flexible ISAs
Flexible ISAs were introduced in 2016 and allow you to manage your money in a way that suits you.
So, what exactly is a Flexible ISA?
With a Flexible ISA, you have the ability to withdraw money from your account and put it back without the replacement cash counting towards your annual ISA subscription.
It means you could withdraw money, do something else with it, then replace it all within your ISA.
There are a couple of rules to remember when making the most of the flexible feature:
- You must withdraw from and pay back into the same ISA account.
- You must pay back the money in the same tax year it was withdrawn.
Say you have £25,000 in your cash ISA made up from
£22,000 saved over previous years and £3,000 which has been paid in the current
tax year. This means you still have £17,000 of this year’s allowance left.
If you withdraw £10,000 from your ISA the new flexible allowance means you can pay up to £27,000 into the ISA during this tax year: the £10,000 you took out, plus the remaining £17,000 of your yearly allowance of £20,000 for this tax year (19/20).
Flexible ISAs are not compulsory. It’s up to an individual provider whether they choose to make their ISAs flexible or not. So, make sure you check with your provider before you start withdrawing your money!
Are all types of ISA flexible?
No, only some ISAs are eligible to be flexible:
- Cash ISAs
- Innovative ISAs
- Cash held within a stocks and shares ISA.
Junior ISAs, Help to Buy ISAs, Lifetime ISAs and the shares, bonds or funds within your Stocks and Shares ISA cannot be flexible.
To throw a little spanner in the works, even those who allow flexibility on cash ISAs may not allow flexibility on Fixed rate ISAs. If they do it is important to be aware you could still be charged a withdrawal fee. Be sure to check the terms and conditions of your fixed rate ISA before taking out money.
How flexible ISAs work
The rules on how the flexibility works changes depending on whether money in your ISA is from old tax years, or the new one.
ISAs with cash from previous tax years only
However much money you withdraw, you can replace it all within the same tax year. But, you can’t put back in more than you have taken out, your annual allowance can’t be used in this instance. You would need to open a new ISA to use up your current yearly allowance.
ISAs with money from the current tax year only
Any money you withdraw can be put back in during the same tax year without it counting towards your allowance for the year.
ISAs with money from previous tax years and this tax year
If you are withdrawing more than you have put in during the current tax year, the money will be taken from this year’s allowance first. Any additional money over the amount you have used up so far will then be taken from the previous years’ funds.
When you are replacing the money, it replenishes the previous years first and then the current year.