The role of Individual Savings Accounts (ISAs) has changed since they were launched over 20 years ago, so are they still worth having?
Since ISAs were introduced in April 1999 the ISA portfolio has been extended to include:
- Junior ISAs (for the under-18s).
- Help to Buy ISAs (no longer on sale).
- Innovative Finance ISAs (for crowdfunding investors).
- Lifetime ISAs (for 18-39-year-olds and a partial replacement for the Help to Buy plans).
Despite the proliferation of ISAs, sales remain dominated by the two basic variants launched in 1999 – the cash ISAs and stocks and shares ISAs. However, tax changes in recent years have called the value of both into question:
- The Personal Savings Allowance (PSA) allows basic rate taxpayers to receive £1,000 of interest free of tax (£500 for higher rate taxpayers and nil for additional rate taxpayers). At current interest rates, exceeding those thresholds requires a substantial deposit (e.g. £100,000 @ 0.5% = £500). As a result, for many savers an ordinary bank/building society deposit is as tax-free as a cash ISA with fewer constraints.
- It is a similar story with stocks and shares ISAs and the dividend allowance, which allow all taxpayers to receive £2,000 of dividends free of tax. At the current average yield on UK shares, that threshold is breached at around £72,000.
- For stocks and shares ISAs, there is also the capital gains tax (CGT) annual exemption to consider. At the current level of £12,300, it makes the CGT freedom of ISAs academic for many investors.
So, are ISAs past their best-before dates? For some investors, they probably are, particularly if savings are modest. For others, ISAs can still offer benefits:
- They leave your PSA, dividend allowance and CGT exemptions unused.
- There is nothing to report on your tax return.
- If you invest regularly over a long term, the ISA tax freedoms can become highly valuable, as the growing band of stocks and shares ISA millionaires can testify.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
Investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers.
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.