ISAs are more flexible than ever

Saving into a tax-efficient ISA is even more appealing now some providers are offering greater flexibility on these accounts. We explain how flexible ISA rules work, and how they could benefit you.

Who's it for? All Investors

The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

What you’ll learn:

  • What ‘flexibility’ means for your ISAs
  • How it affects withdrawals and your ISA allowance
  • How flexible ISA rules affect ISAs opened in previous tax years.

Flexible ISA rules introduced in April 2016 mean you can withdraw money from an ISA and return it in the same tax year, without this counting towards your current ISA allowance.

However, you do need to bear in mind that investments are for the longer term, usually a minimum of five years. If you sell investments to withdraw cash, you might lose money.

The rules aren’t compulsory and not every ISA provider supports them, but as a Barclays Smart Investor customer, you benefit from full flexible ISA support.

In the 2024-25 tax year, you can invest up to £20,000 in ISAs. One of the main benefits of ISAs is that you won’t pay income tax, tax on dividends or Capital Gains Tax (CGT) on any savings or investments you hold in them.

It’s worth noting, however, that if you invest outside an ISA, you won’t necessarily have to pay any tax, as long as your dividends don’t exceed the dividend allowance, or any interest from cash, funds, gilts or bonds aren’t higher than the Personal Savings Allowance.

Only profits made above the annual CGT allowance, which for the 2024-25 tax year is £3,000 will be subject to CGT at 10% or 20% depending on your tax band.

Withdrawals and your annual ISA allowance

A ‘flexible ISA’ means that for cash ISAs, investment ISAs and innovative finance ISAs you have the freedom to withdraw your money and, crucially, put it back again without affecting your annual allowance.

For example, if you put £10,000 in your ISA during the current tax year then withdraw £2,000 later, you can pay this £2,000 back into the ISA you withdrew it from this tax year and still be able to put in another £10,000 before 5 April 2024, taking you up to the current £20,000 allowance.

You can do this with a cash ISA, investment ISA or an innovative finance ISA, as long as your provider supports it, and you have a cash holding in your ISA to draw on. If you’re thinking of switching providers, it’s a good idea to check whether they support the flexibility.

Flexible ISA rules cover dividend payments as well as cash withdrawals. Let’s say you have arranged to have dividends paid into a bank account. You’ll be able to pay these back into a flexible ISA if you want to, without this affecting your allowance.

The flexible ISA rules don’t currently apply to the lifetime ISA. Withdrawals made from the lifetime ISA will forfeit the government bonus and face a 5% charge, unless they’re being used for the intended purposes of the lifetime ISA (funding a first home or towards retirement).

How is it different?

Many ISAs already allow you to get your hands on your money if you want to, but before the rules changed, any money taken out and paid back into the ISA still used up part of your annual ISA limit. If you'd already reached the limit of your allowance for this tax year, you wouldn't be allowed to put any more back in.

Under flexible ISA rules, you can take money out and still put it back, provided you pay it back in the same tax year. Effectively any withdrawals first reduce your current year contributions, and if you withdraw more than you’ve paid in this year then you create a ‘flexible allowance’.

For example, let’s say you have £40,000 in a cash ISA, made up of £35,000 built up over previous tax years, and £5,000 deposited in the current tax year. That leaves £15,000 of this year’s allowance. If you withdrew £10,000 from your ISA, you could put in another £25,000 in this tax year, made up of £10,000 that’s been withdrawn, and the remaining £15,000 allowance.

You can only pay back in withdrawals that relate to previous years’ subscriptions to the same ISA they were taken from. However, if you withdraw the full amount of your current year’s subscription, you could then pay this into any current year ISA.

You have the option to pay money into more than one of the same type of ISA in the same tax year.

Take a look at your Smart Investor online statement to see your current year allowance - this combines current year and flexible ISA allowance meaning that it takes account of any withdrawals that you have made from your account. You can make payments online or by phone if you’d prefer.

Please bear in mind that this article is for general information purposes only. If you’re unsure, seek professional financial advice.

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