As the end of the 2024-25 tax year approaches, many investors will be looking to take advantage of the tax breaks available to them – particularly through individual savings accounts (ISAs).
ISAs were introduced by the UK government in 1999 to encourage people to save or invest their disposable income. There are two main types of ISA – cash ISAs and stocks and shares ISAs – with different risks and rewards. At Vanguard, we provide a stocks and shares ISA.
Here are the eight most important things you need to know about investing in a stocks and shares ISA:
1. There is an annual limit to the amount you can invest
£20,000 is the most you can currently invest in ISAs in a tax year, which runs from 6 April to 5 April the following year. This limit covers all types of ISAs, so if you invest £10,000 in cash ISAs you can only invest up to £10,000 in stocks and shares ISAs in the same tax year. The allowance resets on 6 April and you can’t carry over any unused allowance into the following tax year.
2. There are tax advantages to investing in ISAs
Investments held outside of an ISA in a general account are subject to income tax if they generate dividends1 or interest, and you could also be liable for capital gains tax (CGT) if you make a profit when you sell your investments.
In the 2024-25 tax year, everyone has a tax-free CGT allowance of £3,000. Profits above this amount are taxed at 18% or 24%, depending on your income tax band2. These rates were increased from 10% and 20% in the Autumn Budget in October.
By investing through an ISA, you can avoid these taxes and keep more of your money. Just remember that investing carries risk, so the value of your investments can fall as well as rise.
3. The earlier you start investing, the better
Even if you can’t use the full £20,000 allowance, it’s worth investing as much as you can afford. Even small amounts can grow to a sizeable sum over time. This is because of the power of compounding – when you earn returns on the money you invest as well as on the returns themselves. Compounding is especially powerful over long periods, so the sooner you start, the greater the potential benefits.
4. You can open multiple ISAs of the same type in the same tax year
Since 6 April 2024, investors can open and pay into multiple ISAs of the same type in the same tax year (except for lifetime ISAs). This means you could contribute to two or more stocks and shares ISAs and/or two or more cash ISAs. Previously, it was a case of one ISA of each type, each tax year3.
If you pay into multiple ISAs, you’ll need to keep track of your contributions so that you don’t exceed the annual ISA allowance. Having several ISAs may also make it harder to manage your investments and understand whether you’re on track to achieve your financial goals.
5. ISAs can be transferred between providers
If you have an ISA with another provider, including a cash ISA, you can transfer its holdings to a Vanguard stocks and shares ISA. To do this, you’ll need to provide us with your personal information and details about the ISA you want to transfer, and then we can make the switch.
Just remember that transferring from a cash ISA to a stocks and shares ISA involves taking on more risk with your money. If you’re transferring between stocks and shares ISAs, you may be out of the market temporarily, which could affect your returns.
At the moment, Vanguard isn’t able to accept partial transfers of contributions made in the current tax year. If you want to transfer contributions made in the current tax year to Vanguard, you need to transfer the full amount.
6. A flexible ISA lets you replace the amount you withdraw in the same tax year
Vanguard’s ISA is flexible, which means you can withdraw cash and then put it back in during the same tax year without reducing that year’s allowance. There is no minimum withdrawal amount or minimum account balance.
Keep in mind that stocks and shares ISAs are designed for long-term savings. If you withdraw any money, you’ll reduce the amount you have invested in the market. This could limit the potential for that money to grow over time, so it may not generate the expected returns.
7. Junior ISAs are available for children under the age of 18
Junior ISAs must be set up by an adult with parental responsibility for the child. The annual allowance for a junior ISA is currently £9,000. A junior ISA could help your child fund university or save for a house deposit. When the child turns 18, the junior ISA automatically converts into an adult ISA in their name.
8. ISAs can be inherited after you die
When you die, your ISA can be inherited by your surviving spouse or civil partner without losing the tax benefits.
The surviving partner can add the funds to their own ISA without being subject to the annual £20,000 allowance. They receive an additional permitted subscription up to the value of the deceased person’s ISA.
If you leave your ISA to someone other than your spouse or civil partner, it may be subject to inheritance tax.
1 Dividends are the payments some companies make to their shareholders out of their profits.
2 For more information on CGT rates see HMRC’s website.
3 These rules do not apply to junior ISAs. A child can only have one cash junior ISA and one stocks and shares junior ISA at any one time. These rules also do not apply to lifetime ISAs.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
The eligibility to invest in either ISA or Junior ISA depends on individual circumstances and all tax rules may change in future.
Any tax reliefs referred to are those available under current legislation, which may change, and their availability and value will depend on your individual circumstances. If you have questions relating to your specific tax situation, please contact your tax adviser.
Important information
Vanguard only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described, please contact your financial adviser.
This is designed for use by, and is directed only at persons resident in the UK.
The information contained herein is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information does not constitute legal, tax, or investment advice. You must not, therefore, rely on it when making any investment decisions.
Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.
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